North Korea & the Markets: Overhyped & Overstated

It’s amazing how history repeats itself, and how short the world public’s memories are in relation to key historical events around the world that could have led us to a modern-day classical war scenario.  For the last 16 years, the United States has been engaged in a War on individuals and networks, and protracted to diplomacy, non-kinetic, and rhetorical measures against nations threatening our interest. For North Korea’s case, we’ve constantly been engaged in a prevention posture to ensure North Korea doesn’t generate a weaponizable nuclear weapon.  According the latest news releases quoting the US government intelligence communities, that seems to be the case in the near future.

But from an investment perspective regarding geopolitical situations in the world, the question is not “Will North Korea launch a nuclear missile”, but rather “Why is North Korea wanting a nuclear tipped warhead?”.  The difference between these may not seem dissimilar but they are in one key factor: is the owner of the weapon considered a “rational actor”. Most who haven’t studied the DPRK would have you think that Kim Jong Un (KJU) is a madman, and in some circumstances, this is a true statement. I consider any person who places people in modern-day concentration camps and starves his own people a madman. But as a dictator who does everything in his power to ensure his survival, KJU is not a madman, nor irrational in the sense that we can’t predict his behavior.

Sure, the DPRK’s army is one of the best at denial and deception techniques, and makes it extremely hard for us to know when a missile will pop off out of nowhere.  But at the same time, we also know that one of two things usually happen. First, the missile fails in flight, or second, the missile itself is a messaging tool used by a regime to influence public opinion of his power and strength and flies into a spot in the middle of the ocean.

Just Like Companies, North Korea Has To Show Growth

Just like with stock market investing, when you expect a company to grow, one must look at world militaries through the same lens.  North Korea has been working on long-range missile technology for more than 2 decades, and only in the last 3 years, has had moderate success testing medium range ballistic missiles.  The reason for this is simple: KJU must show the world his “growth” in order to be taken seriously.

Nuclear weapons are no different.  After the height of the Cold War, every nation who has built and maintained a nuclear warhead of some sort does it as a political tool.  In a sense, it’s a seat at the “big boy table”.  No doubt, the Russians maintain the largest stockpiles, with the US coming in at a close second, but then you have China, India, Pakistan,  Israel, France, & the United Kingdom.  China has a small stockpile to assert power in its sphere of influence geographically. India and Pakistan maintain their portions to keep each other at stalemate, as well as bring India to the table in a negotion with China.  Israel is simply to ensure their survival in case every neighbor around them decides to attempt to wipe them off the face of the earth.  France maintains theirs as a relic from the Cold War, as well as the UK having sea-based nuclear arsenals as one of our modern-day intelligence sharing allies.  At the end of the day, nukes give nations more influence in world issues and meetings.  North Korea wants a seat at that table, as well as their close colleagues in Iran.

So, if you go back and ask the second question of “Why is North Korea wanting a nuclear tipped warhead?”, you answer the first question. The answer, plain and simple, is “No”.  KJU, all things with his current mental state remaining the same, must ensure his survival. The minute an indication exists that he will even launch an Intercontinental Ballistic Missile (ICBM), nuclear or conventional, he seals his fate at the wrath of a B-2 Stealth bomber dropping a penetrating warhead into one of his many villas.  I think, all things constant, KJU and the DPRK will eventually have a weaponized form of a rudimentary nuke, but doubt he’ll ever launch one.

Courtesy of Business Insider

Nuclear War and the Markets

I challenge anyone who really thinks we’re going to have a nuclear armaggedon to look at newscast reels every time the DPRK has gotten squirrely.  The major news media latches onto this, squeezing your regular Congressional and White House staffers for copies of intelligence briefings, among bringing on a myriad of analysts to talk about how dangerous the “threat” is in its currrent form. But for 2017 and this news disruption on the market, how do we look at it? Well, my assessment is this: the market dropped a few percentage points over the last couple of days. This might continue or go into a tight range.  Meanwhile, diplomacy will prevail, and North Korea will spin the argument as a win through the normal propoganda machine.  The markets will have their usual 5-day amnesia, and other market factors will begin to take over in the short-run, driving indexes back up to their usual inflationary heights.

As for nuclear war; it’s not going to happen. Period. If you think I’m wrong, I then challenge you to look at the situation 2 years ago when South Korean soldiers were killed along the DMZ. For those American troops who were stationed in Korea at the time, many joint service members could tell you there were plans to move most of the American families out of country due to South Korea’s President Park’s rhetoric back at the North, and the potential tensions that many in-the-know thought was going to lead to actual continuation of the War.  In the scenario of late, we are not at a point where lives have been taken save for the one American tourist who got himself in trouble well before the question of nuclear arsenals came into question.

I do expect that our military is going to send a clear message, like we did when the press releases came out in 2014 of bomber forward-deployments to Guam for a strategic messaging purpose. This round will likely be a tad stronger, but I doubt anything of actual use in-force will come to play from either side. The minute this happens, either nation finds themselves on a slippery slope which, for everyone’s sake, hopefully never happens.