Money and Markets: Investing Insights

The Most Dangerous Paradox of All Time

Martin D. Weiss, Ph.D. | Monday, August 8, 2016 at 7:30 am

I got so many thought-provoking comments from my "Next Black Swans" video, I decided to follow up last week with "Six European Countries Facing Turmoil."
And once again, the commentary is outside the box. Here are some examples, along with my replies …

Peter C. writes "I was born Christmas Day 1941 and remember the sounds of the doodlebugs over London some years later. Today, I personally feel like everyone else felt in 1937-1939, just before the outbreak of World War II."

My reply: Doodlebugs were the world’s very first cruise missiles, specifically designed by the Luftwaffe to terrorize London. But until I read your comment just now, Peter, I had never thought much about them.
I’m not alone. Over 300 million Americans (about 95% of the population) were born too late to remember World War II beyond what they’ve read in history books or seen in Hollywood productions. Moreover, except for Pearl Harbor or 9/11, no one alive today has ever experienced a direct attack on American soil.
All this seems to be making us uniquely complacent about the global drumbeat of war and authoritarianism, including the dangers of nuclear war.
In theory, only the U.S. Congress can declare war. But when under the threat of a foreign nuclear attack, there’s simply no time for Congress to act.
That’s why, if a president wants to launch America’s 925 nuclear warheads (with the destructive power of 17,000 Hiroshima bombs), he can make that decision exclusively and solely by himself. No one can second-guess him. All of the Constitution’s checks and balances are null and void.
The New York Times explains it this way:
"The president’s authority over nuclear decision-making challenges the Constitution’s clear declaration that only Congress holds the power to declare war. In practice, the arrival of the nuclear age dismantled the traditional rules by rewriting the timelines of war. It would take 12 minutes or less for weapons fired from submarines to reach Washington, and 30 minutes for warheads from most intercontinental missiles."
The great irony of this election is that the majority of Americans don’t trust either candidate of the two major parties to make the right decisions. That means …

Unless a third party candidate miraculously wins, U.S. voters will put a president in charge of the nuclear codes they don’t trust.

Hillary Clinton is trying to make this a headline political issue — for the sake of a Democratic victory. But it’s clearly a nonpartisan issue that applies to any candidate — for the sake of all mankind.

The Most Dangerous Paradox of All

Clinton has declared she’d be ready to use nuclear weapons. So has Trump. When queried about nuclear weapons, he reportedly asked a question of his own: "If we have them, why can’t we use them?"
Meanwhile in the U.K., Prime Minister Theresa May is on the same page as both U.S. presidential candidates. Two weeks ago, when asked by a member of parliament if she would "authorize a nuclear strike that could kill hundreds of thousands of innocent men, women and children," she firmly replied "yes."
In response, you’d expect most of the U.S. media, especially The New York Times, to respond with outrage. But it hasn’t.
Quite to the contrary, in a landmark piece last week, the Times argues that, unless our leaders are truly willing to use nuclear weapons, and say so unambiguously, the nukes lose their power of deterrence. Ironically, the article concludes, any sign of presidential hesitation would make them far more dangerous.
The paradox is that their destructive power must remain so horribly unthinkable that no sane leader would ever actually deploy them. As Dwight D. Eisenhower said nearly 60 years ago, "You just can’t have this kind of war. There aren’t enough bulldozers to scrape the bodies off the streets."

The V-1 flying bomb deployed by Germany in World War II, also known as the “doodlebug,” was the first pulsejet-powered cruise missile. Today’s modern missiles, including those fired last week by North Korea, are far more advanced, but still use some of the same technology.

Here’s the most recent irony …
Last week North Korea, the world’s newest nuclear power, fired cruise missiles into the Sea of Japan. But the news could not compete with election campaign headlines. Muted statements of global outrage were barely heard. And unfortunately, the lessons of the doodlebug remain, as before, mostly forgotten.

Heinz K. writes: "Despite the Western world’s ridiculous overconsumption (driven by government) … full employment will assure total poverty for all. It’s time to think for oneself and ask questions. Blind following means destruction."

I take it that your words "blind following" are intended as a not-so-subtle reminder of Nazi Germany.
That seems to echo the comments of Hewlett Packard executive Meg Whitman, who recently noted that democracies have seldom lasted longer than a few hundred years. She warned that those who say "it can’t happen here" are naïve.
Whether you agree with her politics or not, you’d be hard-pressed to find a majority of voters in either party who strongly disagree with her warning.
What nearly everyone seems to be missing, however, is the connection you make to the government’s push for never-ending prosperity. The fact is, it’s actually not hard to connect the dots from …

• The Fed’s over-the-top money printing to …
• The nation’s unprecedented concentration of wealth to …
• The most dramatic political polarization since the Civil War.

More on this in response to the next reader comment …

Xiao-Ming points out that the "overall trend of extreme wealth concentration in many parts of the world is worrisome. But I am more worried about the trend of the shrinking middle class in America. This only leads to social instability as we have started to observe in the last couple of years."

Yes! Social instability as depicted by the black bars of this graph — the most extreme wealth concentration in a century.

Black bars = percentage of America’s wealth held by the top 0.01% (one in ten thousand households). Red line = proportion of votes in the U.S. Congress cast strictly along party lines, typically disregarding the actual issues. For a full explanation, see Next Black Swans.

But that’s not all. In tandem with the wealth concentration, we are also witnessing political instability in the form of the most extreme division and dysfunction since the American Civil War.

Ian adds this insight: "The Fed’s QE I, II, III and IV. U.K. struggling. EU money printing gone mad. Japan going ballistic. Auto bubble. Student loans. Negative interest rates everywhere. Black Swans? We’re surrounded by them! The only game left seems to be gold and silver. But even that’s being twisted."

I agree that Black Swan shocks can come from almost anywhere. But I disagree that gold and silver are the only game left. Right now, the shocks — and fear of more to come — are still driving global capital into U.S. stocks, especially those with the strongest balance sheets and earnings track records. But as Mike Larson points out, how long that lasts, of course, remains to be seen.

Greg writes "Martin, it sounds as if the EU had expectations that they could totally socialize Europe. The countries that truly want to maintain their sovereignty should stop fighting each other and focus on saving us all from a totalitarian one-world government."

I agree that’s the underlying rationale behind Brexit and similar movements in major Western European countries. It’s all about freedom and autonomy. It’s a powerful popular demand that’s rapidly gaining momentum. And it adds great credibility to Larry Edelson’s 2013 forecasts of civil strife and decline in Europe. All strong reasons to continue following the Great Money Tsunami of flight capital to safer havens.

Thomas S: "Terrorist attacks are no longer Black Swans. Remember how the European Union and the IMF cracked down on Greece to bail them out. Now they’re seeing the results."

I get your first point: Although no one can pinpoint where or when they will occur, terrorist attacks have unfortunately become more predictable overall. Their shock value is declining. And much of the world is sinking into a stupor of eerie indifference.
But I don’t get your second point. What’s the connection between the IMF crackdown of Greece and terrorist attacks?
Here’s how I see it (and maybe what you’re trying to say as well):
The massive EU bailouts of Greece have made virtually no one happy. Most citizens of Germany and other richer EU nations were livid that their tax dollars were thrown down a bottomless pit. Most citizens of Greece were equally angry at the Draconian restrictions on their freedom to continue spending.
All justified by the EU authorities as "necessary sacrifices" to keep the European Union together!
But now, after all those sacrifices have been made, Britain suddenly decides to stab the EU in the back with a knife that’s far bigger than any Greek default!?
The end result can only be the demise of the euro and still more flight capital rushing to safer havens like the U.S.

Perttu H., writing from Finland, seems outraged: "What are you talking about? What kind of safe haven is the U.S., with its economy soon going to collapse?"

I think you missed the main point of my Next Black Swans video:
Despite its troubles, the U.S. is still widely perceived as a safe haven by global investors fleeing Europe, the Middle East and beyond. And it’s that perception that is what’s helping to boost the U.S. economy, currency, stocks and bonds.
Whether that view of the world is ultimately correct or not is another matter entirely. Indeed, the "strengths" of the U.S. economy belie its greatest weakness: An overreliance on the superdrug of quantitative easing, leaving enduring side effects that could be worse than the original disease.

Mike W. comments: "What a shame you don’t have much idea of the real reason for Brexit and the rest to leave the EU! It isn’t about money, but that helps!"

Mike, you don’t tell us what you think the real reason is. Are you talking about immigration? National independence in general? Those issues are more directly connected to money than most people may think. I’m talking about …

• Money decisions at the top by the European Central Bank. And …
• Money consequences at the bottom in terms of the impact those decisions have on jobs, the cost of living and much more.

Peter M. explains it this way: "The real problem in Europe, hardly discussed in the Brexit debates, is the euro. A common European currency will only work if all participant economies are of similar wealth per capita. This is not so in Europe, and countries like Greece have no realistic way of adjusting by devaluation. The U.K., in contrast, is not in the euro and has not been locked into an unrealistic exchange rate."

Good point! If more than half of U.K. voters decided to abandon the European Union even without being a part of the euro, imagine what other EU members will do in order to get relief from their euro headaches.
Bottom line: No one can predict the outcome of these frightening trends. No one can be fully prepared for everything that might possibly happen. But as investors, there are very concrete steps you can take right now:
First and foremost, build your cash reserves.
Second, make sure your cash is kept in a safe place. (To check the safety of your institutions, or to find the safest ones in the world, go here.)
Third, be sure to hedge against declines, following my guidelines in this free guide.

Pam writes "I could not get the video to play past the first 30 seconds. Tried all links."

My apologies, Pam. That issue is now fixed. Just click here.
Good luck and God bless!
Martin
P.S. Thank you VERY much for your comments and your interest! The Next Black Swans has now topped 20,000 views and is still going strong.

Dr. Weiss founded Weiss Research in 1971 and has dedicated his entire career to helping millions of average investors find truly safe havens and investments. He is Chairman of the Weiss Group, which includes Weiss Research and Weiss Ratings, the nation’s leading independent rating agency accepting no fees from rated companies. His last three books have all been New York Times Bestsellers and his most recent title is The Ultimate Money Guide for Bubbles, Busts, Recesssion and Depression.