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Double Dog Dare

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DOW – 204 = 21,844
SPX – 35 = 2438
NAS – 135 = 6216
RUT – 24 = 1372
10 Y – .03 = 2.21%
OIL – 1.00 = 48.56
GOLD + 8.90 = 1286.80
BITCOIN – 0.11% = 3441.49 USD
ETHEREUM + 0.43% = 301.57

The S&P 500 declined 1.45 percent, the worst decline since May. The Nasdaq composite dropped 2.1 percent, with Apple (AAPL), Alphabet (GOOGL), Amazon (AMZN) and Netflix (NFLX) all trading lower. It was a broad-based decline on Wall Street. The CBOE Volatility Index (VIX), a gauge of fear in the market, soared more than 40 percent to trade at 15.98. It also hit its highest level since May.

President Trump said North Korea would face “fire and fury” if it threatened the United States. North Korea dismissed the warnings as a “load of nonsense”, and outlined plans for a missile strike near the Pacific territory of Guam.

And today, Trump ratcheted up his rhetoric, saying his “fire and fury” comments may not have been tough enough, and North Korea should be “very, very nervous”. China is the largest trading partner with North Korea and China has called for dialogue to end the crisis but has otherwise been quiet.

China’s interests do not include a unified Korean Peninsula. When it comes to assessing global geopolitics like the situation with North Korea, we don’t know how this will play out. It could be a brilliant bluff or it could be very dangerous bravado.

Here’s what we might see in the marketplace: stocks tend to react badly to the prospect of war but the exact reaction varies significantly, Treasuries generally move higher – pushing yields lower (The yield on the benchmark 10-year note touched 2.20 percent Thursday, its lowest level since June, although it is worth noting that junk bonds have taken a hit recently – and that may be separate from concerns about war; the cost of protecting high-yield bonds against default in the credit-default swap market has climbed to the highest since mid-July), oil and other commodities tend to jump ahead of a geopolitical event and sell off afterwards.

And of course, gold has started to shine again.

Pimco told investors to pare U.S. equities and junk bonds, but keep exposure to real assets, such as inflation-linked debt, commodities and gold. T. Rowe Price cut its stock allocation to the lowest level since 2000. Morgan Stanley strategists said investors should consider betting against U.S. junk-bonds as recent price weakness may be the beginning of a correction.

Geopolitical turmoil tends to drive volatility but not necessarily trends. In other words, the contrarian play usually works. Warren Buffett has described the strategy as “stay calm when all hell breaks loose.”

Meanwhile, it is a big distraction from other issues such as tax reform, the debt ceiling and healthcare – which you probably thought was a moot point by now. Senate Majority Leader Mitch McConnell is refusing to sign-up for an ambitious White House timeline on tax reform that calls for legislation to sail through by fall.

And he’s now engaged in an extraordinary war...


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