White House to North Korea: "The Clock Has Now Run Out"

The problem stemming from the Korean peninsula is nothing new, but a complacent global market has made North Korea a rogue threat not only to national security but the economy.

As the North Korean nuclear program has steadily escalated from U.S administrations spanning more than three decades, the first strike nuclear risk is becoming a reality today.

Following the July 1953 Armistice agreement the Korean War may have stopped the hot war, but no permanent peace was reached. Make no mistake, for the North Koreans — we are still at war.

The United States currently has 15 military bases in South Korea. The U.S military has a force of 28,500 in South Korea with an adjacent force of around 49,000 in Japan.

It is clear by an overall show force that the U.S government views the region as essential to national security interest.

While North Korea may have a funny pariah look with an outlandish leader, bad haircuts and Dennis Rodman visits — the country continues to pose a very serious, very dangerous problem masked underneath.

The rogue state has developed asymmetric capabilities that continue to escalate tensions around the world.

Targeting the private sector, North Korea coordinated a cyber attack that hit Sony, a major Japanese owned company, which shut down significant portions of its online operations.

The regime was also responsible for the sinking of the Cheonan, a South Korean vessel with 104 personnel onboard after being attacked by a North Korean submarine. These warfare tactics were heightened further in the February 2017 assassination of Kim Jong-nam, the half-brother to the current North Korean leader, who was killed with with a VX chemical weapons agent.

These are all dangerous signs t an irrational and unstable regime. The most threatening signal, and of paramount concern to security and the economy, is the nuclear threat.

Not only does this threat pose imminent geopolitical risks, but it could be a massive catalyst to shaking global markets and trade.

North Korean Nuclear Program and Economic Triggers

The financial system since the 2008 global financial crisis has not recovered. As economist and former managing director on Wall Street, Nomi Prins recently warned about the global economy, “A downturn is inevitable. It’s a matter of when, not if.”

The threat of North Korea triggering a global downturn without even triggering a missile beyond its shores is a very concerning possibility.

It is clear that Kim Jong-Un does not follow the logic of “Mutually Assured Destruction” or even conventional nuclear deterrent policy (similar to the U.S and Soviet era systems).

The inability to measure, or comprehensively understand, the North Korean leadership related to a nuclear threat, adds to an escalating amount of instability. That volatile element is particularly concerning for trade, regional cooperation and any permanent solutions to the North Korean missile program.

China, Trade and North Korea

The North Korean economy has one of the least open economic systems in the world. The country faces massive shortages, constant power outages and chronic food shortages.

While the North Korean market is a non-factor, a vast majority of its export economy goes north across the border to neighboring China.

Beijing has made the dictatorship heavily dependent on its purchasing of coal from the North Korean regime.  After the latest series of missiles launched from the North, China has officially declared a one year hiatus to this purchasing coal.

The economic squeeze will play an important dynamic to an already unstable regime.

Yet, we are already seeing the economic fallout unfold in various ways.

Following the Chinese reactive measures to North Korean aggression, the also U.S pressed forward by urging South Korea to activate a broad reaching missile system.

One editor of the South China Morning Post, owned by the Chinese owned Alibaba Group,  noted:

“As a reaction to the South Korean deployment of the US-developed THAAD, designed to protect against a nuclear attack from North Korea, China has launched a kind of shadow boycott of almost all things South Korean.

Economic retaliations violate the World Trade Organization (WTO) treaty, among others, so the government has, as it so often does, made it unofficial, raising trade barriers through tightened regulations, setting up custom procedural obstacles and influencing consumers through state-media led campaigns.”

Today, Chinese President Xi Jinping is set to meet with President Trump at his Florida estate. Following a North Korean intermediate range ballistic missile launch the day before, tensions between the U.S and China have reached a new level.

The path forward on how to approach the nuclear threats from the Korean escalated even further when South Korea tested its long-range ballistic missile.

The ramifications of South Korea signaling strength by force will not be missed by Beijing, where economic backlash has already begun to unfold.

China has already unleashed retaliatory trade practices against South Korea, going as far as having armed police being stationed in front of South Korean business stores located in cities throughout mainland China. The Chinese fault-line over North Korea shows conflicts in strategic interest that could add significant pressure to markets going forward.

China and U.S Negotiations Turn to North Korea

The Chinese, lead by President Xi are indeed an authoritative regime and firmly understand power dynamics. The communist government is also determined to supersede the United States as the world’s most powerful economy.

If the world is dependent on China and the U.S to come to an agreement on the nuclear threats of North Korea, markets appear to be left to examine two very polarized agendas.

Two senior White House officials while briefing reporters on North Korea declared that “the clock has now run out and all options are on the table.”

As China deals with a financial system on the brink of economic disaster while also having to manage territorial disputes in the South China Sea, North Korea could be a major catalyst for disaster.

While China might be boxed in, the U.S in not immune from the crisis unfolding in Asia.

For the U.S domestic economy the Dow fell over 1% in one day in March, the worst market hit of the Trump administration, on the same day North Korea attempted to have a missile launch.

As Richard Haas has indicated, “The real question is whether China will use some of the leverage it denies it has but surely possesses with North Korea. It might, if only because it is not in its interests to have a conflict on the peninsula that disrupted the region’s economy and resulted in a unified Korea in the American strategic orbit.”

The immediate concern is, can the first meeting between Trump and the Chinese leader held in Mar-a-Lago yield results?

The expectation in the market, at least for now, is that the problem will simply be prolonged to another date. At best, the meeting could offer an understanding of what each party brings to the table and may be willing to negotiate.

All this while North Korea continues to mount global threats and rattle markets.

The Commerce Department recently reported that U.S trade deficits with China have dropped sharply, showing that the connection between the two countries is gaining strength. The optimism in the politically sensitive trade deficit could show opportunity for markets, but with a dark cloud of North Korea — everything is in flux. 

Economist and currency wars specialist, Jim Rickards reveals, “The problem is so long-standing and discouraging that markets have become complacent, as if North Korea were nothing more than background noise — annoying but ultimately harmless.”

Rickards explicitly warns, “Nothing could be further from the truth.”

“All of North Korea’s programs are leading to one thing: the ability to hit Los Angeles or another large U.S. city with a nuclear first strike and kill millions of Americans in the process.”

Rickards, “Market volatility has been near all-time lows for an extended period. The situation in North Korea may be about to wake investors out of their slumber.”

Jim Rickards leaves with definitive actions shooting out a warning that, “War is closer than investors realize. The time to move to gold, silver, cash and other hard assets and out of vulnerable equities is now — before the shooting starts.”

Thanks for reading,

Craig Wilson, @craig_wilson7
for the Daily Reckoning

The Daily Reckoning