Trump’s Last-Ditch Attempt to Avert War with North Korea
President Trump wrapped up his historic visit to Asia this week.
Trump’s journey was the longest overseas trip of his presidency and the longest Asian visit of any president in 25 years.
After a stopover in Hawaii, Trump proceeded to Japan, where he met with Japanese Prime Minister Shinzō Abe, and then to South Korea where he met with President Moon Jae-in.
The capstone of the trip was Trump’s arrival on 8 November in Beijing for meetings with Chinese President Xi Jinping.
Much of the reporting on this trip has involved international trade, but it’s a mistake to focus on that.
This trip was a pre-war gathering of allies (Japan and South Korea) and potential allies (China) in a last-ditch struggle to head off a hot war with North Korea, led by the reckless Kim Jong Un.
At this point, there are only four possible outcomes of the US-North Korea confrontation over nuclear weapons:
- Kim Jung Un stands down and gives up his nuclear weapons program.
- The US and China combine forces to decapitate the Kim dynasty and force regime change in North Korea.
- Preventive attack on North Korea by the US before 20 March 2018.
- The US accepts a nuclear-armed North Korea and relies on containment and deterrence to constrain its actions.
Based on public statements of US officials, my recent meetings in Washington with the director of the CIA and the national security adviser and other sources, I estimate the degree distribution of those possible outcomes as follows:
- Kim stands down: 10%
- Regime change: 20%
- War: 70%
- US lives with nuclear North Korea: 0%.
Trump’s visits to Japan and South Korea were about leaving the door open to negotiations in the hope that Kim would stand down while also preparing for war.
Trump’s visit to China was about asking for assistance in regime change.
Xi is unlikely to agree to help the US in this regard.
This means war.
Instead, Trump and Xi no doubt discussed China’s ‘red lines’ in North Korea so that a war between the US and North Korea does not escalate into a war with China.
Almost none of this is fully priced in public markets, although markets seemed to be getting the message last week.
A war between the US and North Korea will cause a global flight to quality assets and currencies at the expense of other asset classes.
Here are the likely market moves as the prospect of war becomes clear: Dollars, euros and Swiss francs will rally at the expense of emerging-market currencies. US Treasury bonds will rally in price, pushing yields lower.
Curiously, US stocks may rally after an initial pullback when the shooting starts.
Defence contractors, tech companies, commodities producers, utilities and energy companies should all rally. War is generally good for some sectors of the economy and may finally give the Fed the inflation it’s been looking for in vain the past eight years.
Mark my worlds: the war is likely coming in a matter of months.
Investors should look at the entry points for the assets described above and position themselves accordingly now (go here to learn about a full and strategic gold plan you can implement right away).
At a minimum, it’s a good time to increase cash allocations so that you can be nimble and dodge financial bullets once the real bullets start to fly.
Below, I show you why the latest setback in North Korea’s nuclear program could actually speed up the timetable for war. Read on…
for The Daily Reckoning Australia
The North Korean Standoff Has Taken on an Added Dimension
By Jim Rickards
The North Koreans are determined to develop a nuclear-armed arsenal of ICBMs to ensure that the US does not attack the Kim regime.
But North Korea has suffered an unusual and self-inflicted setback in its nuclear weapons development programs — ‘mountain fatigue.’
Several tunnels collapsed recently, killing as many as 200 North Korean workers. It was not the total collapse some feared, but it was an indication that the threat of total collapse is real.
North Korea uses underground facilities in Mount Mantap to test its nuclear detonations. The most recent test on 3 September was of an H-bomb, North Korea’s most powerful yet, estimated to have produced a blast of up to 280 kilotons.
A hydrogen bomb is different from an atomic bomb, and far more destructive.
The atomic bomb works by fission, literally ‘splitting’ an atom, so that a neutron is emitted, collides with other atoms and causes a chain reaction with an enormous release of energy.
Both methods start a chain reaction. But the fusion method in a hydrogen bomb is orders of magnitude more powerful. The destructive force can be 100 or even 1,000 times greater than that of an atomic bomb.
The combined effect of this latest blast and prior tests has hollowed out and weakened the structure of the mountain itself. Based on seismic readings from the area, including a series of earthquakes, Japanese and Chinese scientists had warned North Korea that the mountain was in danger of collapse.
Then on 30 October the warnings proved correct.
A more dramatic collapse could have serious environmental consequences, in addition to the geopolitical consequences.
It could prove disastrous to neighbouring China because it could release a huge cloud of buried radioactive material that would be carried by prevailing winds over Chinese cities.
Now, North Korea will likely keep using the facility because they don’t care about worker deaths or radioactivity exposure for their own people or the Chinese.
Yet nature may have the last word. If the Mount Mantap facility is rendered unusable due to extraordinary damage, Kim will have to continue his nuclear weapons testing elsewhere. This implies tests in the atmosphere, something Kim had already threatened to do before this recent tunnel collapse.
In 1963, the US and the Soviet Union agreed to stop testing nuclear weapons in the atmosphere, underwater, or in space. Yet North Korea seems willing to violate that international norm.
So atmospheric testing would be viewed as even more provocative by the US and the rest of the international community. A collapsing mountain may therefore provoke one more escalation on the path to war in the form of atmospheric tests of nuclear weapons.
Meanwhile, the US is ratcheting up the military pressure on North Korea.
The US has a total of 11 aircraft carrier strike groups. Each strike group is led by a nuclear-powered aircraft supercarrier. Ten of the supercarriers are of the Nimitz Class and one is of the new Ford Class, with improved technology and other operating efficiencies.
At any one time, as many as eight of the carriers may be in homeport undergoing repair and maintenance, for training or otherwise awaiting deployment. Only four or five are actually underway in one of the US Navy’s major areas of operation (AO) at once. But right now, three aircraft carrier strike groups are in the Seventh Fleet AO in the western Pacific, converging on the Korean Peninsula.
Each strike group contains more firepower than the entire navy of any other country in the world. Now the US has concentrated three strike groups on Korea.
At a minimum, this is a show of force designed to convince Kim Jong Un to stand down from his efforts to build an arsenal of nuclear-capable ICBMs that can end civilisation in the US.
Let’s hope that works. If not, these same vessels will be used to destroy the Kim regime and eliminate the threat once and for all.
The latter outcome is highly likely in my view.
The time for diplomacy is past and Trump is busy trying to drum up support for concerted action against North Korea that has as much regional support as possible. That was the driving imperative behind Trump’s Asia trip.
Leading officials have previously made it clear that the US would engage in pre-emptive war with North Korea to stop their nuclear program if necessary. Secretary of State Tillerson also refused to rule out supplying nuclear weapons to US allies including Japan and South Korea in order to deter North Korea on a regional basis.
Last summer, for example, a new rocket test might cause the stock market to drop about 1% on fears of a war between the US and North Korea. But the market would quickly recover as diplomats hit the airways to reassure investors that everything was under control (it’s not).
Then another missile would fly, the market would go down, it would bounce back, and all was well.
Eventually the stock market learned to normalise missile launches.
It’s as if someone said, ‘Hey, if the markets are bouncing back every time, what’s the point of going down in the first place?’
No doubt the computer algorithms were adjusted accordingly. But, this is a little like a chain smoker rationalising that somehow nicotine won’t kill him because he hasn’t died yet. That’s false, and the false belief will get you in the end. Still, we may be reaching the point where the market starts to take this seriously.
Right now the markets aren’t getting the message.
They’ll be forced to wake up soon enough and reprice for these risks.
You don’t have to wait for the market’s wake-up call. This looks like a good opportunity to lighten up on listed equities and reallocate to cash, gold, silver and other safe haven assets.
When the bullets start flying, probably early in 2018, look for rallies in these assets – Treasury bonds, the US dollar and gold, with potential collapses in emerging markets as hot money floods back into the US as a safe haven in a world on the brink of war.
It may not seem like it now, but things can get serious fast.
for The Daily Reckoning Australia