North Korea And The Markets

I read the following excerpt in the morning edition of NightWatch for April 4.

An important reason [the threat of actual war] remains low is that spring planting has begun in North Korea. As a nation that treats self-sufficiency – juche – as a national theology, the North must feed itself as much as possible. North Koreans would experience mass starvation by October if they did not devote almost all human resources, including the Korean People’s Army, to planting in April. Even the North Korean armed forces are expected to grow a significant portion of their food. They also guard military and non-military farms from poachers.

NightWatch further argues that “Missiles will fly and nuclear tests might occur as Kim Jong Un commands, but he does not control the agricultural cycle and its disturbances. North Korea is absolutely bound to that cycle for good or bad results. North Koreans will respond if attacked, but the senior party officials, the vice marshals and the generals know everything the Kim family regime has built since 1950 would be destroyed in a war with the US, but their enemies would survive. For the North Korean vice marshals and the generals, there is no profit in war or peace; only in the constant threat of war.”

The complement to that argument is that the US is at maximum advantage right now since the North Koreans are so dependent on this agricultural cycle.

Memories of the Korean War of the 1950s are deeply buried or nonexistent for most people in the United States, but not for all. The same holds true for people in China. So while the current tense situation has a precedent, all parties, including South Korea, are drawing more on their recent experiences than on those of a half-century ago.

There is no way to forecast the actual onset of a shooting war. It is possible, though, to observe rising tensions and war preparations. All parties are doing that now.

Wall Street Ignores Threat

Financial markets in the US have seemed to ignore the increasing risk of war. Until this week, the was at the same level it was on Valentine’s Day. Meanwhile there has been some change in credit spreads and some flight to quality in highest-grade bonds. The gold price continues to hold its level, and buyers seem to enter on any weakness. The summary assessment is that there are market crosscurrents but not a severe reaction as if we were going to war.

All this could change rapidly with any US or South Korean or Japanese military action. Remember, Japan is very threatened here. As in the US, rhetoric in Japan has intensified. We do not know the degree of Japanese preparedness, but we do know that the present government is trying to amend the Japanese constitution and raise the allocation to defense expenditures.

Strategy

At Cumberland we have a cash reserve in both our US and international ETF accounts. We would act very quickly if we saw signs of an actual shooting war or even if we saw early signs that war was imminent. A rapid market response to war tensions might occur at any time, but a market selloff could provide a panic entry opportunity for our volatility strategies.

Just as there are many people working in the financial services industry who have never personally experienced rapidly rising interest rates or inflation acceleration or a Fed tightening cycle, there are also many who do not have the experiences that older folks recall from Korea or Vietnam. North Korea has a million men in its standing army. The US has 28,000 troops on a ceasefire line established during the Korean War. They and our South Korean allies are in a high state of readiness and on full alert.

Anything can happen after this weekend’s meeting with China’s leader at President Trump’s Florida residence.

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