Armed Forces

The Wolf who cried “Boy”

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North Korea’s threat to fire a nuclear missile at Guam should the US try anything to jeopardize the hermit kingdom’s nuclear programme is more the domain of an hysteric media for now. He is the wolf crying boy – “I will eat your sheep when I wish, what are you going to do about it?” Of course, no sane government can dismiss his threats. The 33-year old leader has assassinated subjects and relatives who he feared might pose a challenge to him. He taunts his enemies in full knowledge the collateral damage the West may suffer would likely be factor fold higher than he stands to lose. North Korea’s GDP is estimated to be around $12 billion annually. Tokyo’s GDP is estimated to be around $1.5 trillion, 125x larger. Seoul’s GDP is around $780 billion (65x North Korea) but is located in shelling distance. From a purely militaristic standpoint, North Korea doesn’t stand a chance. The US has spy satellites parked permanently over North Korea surveilling troop movements, missile test sites and US submarines will have constant watch over Pyongyang’s naval activity. Mutually Assured Destruction (MAD) is not a bargaining chip in this case. While it does raise the ‘risk’ factor, it is not enough to exclude war on the peninsula.

The problem is that all the while no action is taken, PyongYang’s arsenal grows more sophisticated. Kim has no plans to halt his development. In 1994 then President Bill Clinton came closest to taking action against its nuclear capability but in the end chose diplomacy. We are 23 years on and the capabilities are such that this game has increasingly limited life span. Trump made his thoughts clear in a 1995 interview. Try to talk him out and if all else fails take the military option

The more advanced his arsenal becomes, the more weight his demands carry. Kim is in his 30s. Assuming the West does nothing, there is another three decades of threats and bellicose to consider. Over time its weapons programme will be sufficiently credible to hit Washington DC. Just like Russian missiles in Cuba, America will not allow a condition which could threaten it to exist.

North Korea has 3 main nuclear missile launch sites (Musudan-Ri,  Punggye-Ri and Tongchang-Ri) among the fourteen nuclear facilities ranging from R&D, power generation,  mining and refined fissile material production. A surgical strike would be difficult to achieve without North Korea getting away a few missiles itself.

Why Guam? Of course one can view his threat in several ways. One, Guam is the current realistic technical capability of his nuclear weapons, two; Kim hasn’t said he’ll strike Washington DC which should be interpreted as evidence that he is not completely deranged and bragging about capabilities he does not yet have, three; he could theoretically bomb the US military installations in Okinawa which is closer than Guam and more likely to score a relative hit but he has been careful not to drag Japan into this contest (yet) and finally; his nuclear programme is his only bargaining chip. Were Kim to cease his atomic aspirations, he would literally be a sitting duck. He knows – as did his father and grandfather before him – the regime survives on the will of the Rest of the World to appease it. If he has no trump card, the RoW can ignore it.

On April 10th this year, China’s special envoy on the North Korean nuclear programme, Wu Dawei, visited Seoul with the idea of pushing a harder UN resolution in case of another nuclear test. In the short term China is hoping a short term halt to coal imports will bring Kim Jong-Un to heel they have not ruled out removing him entirely. It is the least preferred option but Trump’s moves will only mean China is being forced to up the ante. However China has been lamenting that it can’t force Kim to come to heel. Once again this is partly China testing the will of Trump versus his predecessor. Do not think for one second that China hasn’t been channeling Sun Tzu as to how it can pull off a geopolitical masterstroke by bringing Kim to heel and the US to back down. This is becoming harder to achieve, even more so with an unpredictable president.

Let us not forget the strategic benefits of North Korea to China. It provides a buffer to the US friendly South Korea and keeps furthering China’s status as a dominant force (economically and militarily) in the region. One of the last things China wants is the equivalent population of Australia (24 million) as refugees on its northern border. Best it remains contained inside a regime presiding over a tiny economy. Even less desirable is a US invasion/strike which puts a US protectorate on China’s doorstep.

Global markets are not reacting too erratically to this crisis. They are collectively taking the path of most common scenario vis-a-vis history to date. Minor risk on. Even Korean CDS spreads, at 14 year highs (61) remain well down on GFC and the death of Kim Jong-Il. However a president who wants to reassert US foreign policy after 8 years of willful abuse under his predecessor may be more than willing to take decisive action and put an end to the North Korean problem. He won’t risk it unless his generals can give a very high level of assurance the collateral damage will be minimal

While some media want to believe that Trump is itching for a war in North Korea or Iran to resurrect his sliding poll numbers, that is an obtuse way of thinking. North Korea is a growing threat. Pure and simple. If North Korea gets a capability to potentially hit the US mainland then that is untenable. Any country that threatens to attack another puts itself on a geopolitical chess board of its own making. This is dragging China into a game it would rather not play but inevitably Beijing realizes that it has to take control before Trump takes it from them leaving them in the worst of all worlds.

Cooler heads to prevail? Maybe but something suggests that North Korea is brewing beyond what markets are currently pricing.

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NATO Facts and why Macron’s arrogance is no better than Trump’s

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While social media splashes around a US contribution to total NATO spend of 73% it in reality is a third of that. Only the USA and UK spend over and above NATO commitments as outlined in the chart above. Even the Greeks meet half the requirement! Germany is below not only NATO guidelines but the media would never tell you that. Trump has a point. In fact the reason much of the military spending numbers below the requirement stems more from inefficiency than anything else.

What many fail to understand is that salaries and benefits (housing, education and healthcare) for military staff tend to consume 3/4s of the budget. Procurement is a dog’s breakfast and influenced by age of fleets, battalions, interoperability and so forth. While NATO isn’t exactly group buy the us wins by default of having access to the best cost/performance equipment allowing better bang for the buck. Little Estonia can’t get the same economies of scale.

The “contribution” (click here) question is clouded by two things. Under Obama, the US has cut its NATO contribution from 5.29% of GDP when he took office to 3.6%. NATO Europe had met the minimum expected contribution of 2% but this has slumped from the tech bubble collapse of 2000 to 1.47% today which has meant the only thing keeping NATO’s overall budget above target has been Uncle Sam!

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So once again social media muddles a message. It takes 10 seconds to go on NATO’s website and fact check.

Instead the media is more focused on pointless clickbait on whether Trump can hold Melania’s hand without being swatted away or who won the vigorous handshake contest – he or Macron. In fact Macron’s deliberate snub Of Trump when he met all the leaders spoke volumes. He made no conscious effort to shake his hand first. He made a point of sucking up to his EU cronies first and spent needless time making worthless chitchat before even acknowledging the leader of the strongest nation on earth. We shouldn’t be surprised. Best have Trump inside the tent p1ssing out than outside p1ssing in.

Even if they want to delegitimize Trump they play a silly game. Much like business leaders being bullied on social media to leave Trump’s business council (Uber chickened out), the EU plays a dangerous game of isolating Trump. If they want to prevent him from being the “unhinged” orange buffoon they think he is they’d do much better to be welcoming, accommodating and flattering his eminence. That way they can bring balance and find common ground. They show no signs of even beginning to try. By snubbing him they shouldn’t be surprised if he acts independently. Yet Macron acts no better than Trump and the media lavishes praise on the exact same antics they crucify The Donald over. Typical double standards.

Be careful what you wish for! The world needs a healthy US and stunts like this only fray the lines of trust and partnership further. Sure, the America First policy stance is affronting but if the EU want to expedite the process then keep up the Trump bashing. It doesn’t mean Trump bumping (hey Trudeau did it in Canada to a female member of parliament) other dignitaries shows good character but he knows he’s being ridiculed and the media sees it as their only form of attack. The problem is they forget 75% of Republicans STILL approve of his job performance.  He may only be doing a C+ on performance in office but he isn’t anywhere near the F- portrayed by the media.

Tsunami Tales Pt.4: the sea wall of Ishinomaki

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Ishinomaki Port in Miyagi Prefecture was hit hard by the March 2011 tsunami. The sea wall defenses being erected (as pictured) run the entire length of the town (15km). Not only are the sea walls running out to sea they are being built immediately behind the warehouses sitting on the harbour front. On top of this dirt mound (already at an elevated level) gigantic concrete blocks will be layered in top.

Also a lot of trees are being felled in the smaller towns to the north meaning a lot of wood is being exported.

The hotel I stayed at was full of construction workers. Hotel Route Inn in Ishinomaki is cleaning up with more or less full occupancy during the week if the breakfast hall was anything to go by. Fly-in, fly-out workers is my guess.

Ishinomaki is also the site of a Japan Air Self Defence Force which lost 16 of its F-2 fighter jets (half of those stationed there) which were damaged by the tsunami. Why on earth they weren’t scrambled beggars belief. All had to be written off as the salt corrosion meant a rebuild was too expensive.

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Follow the market on North Korea

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Follow the market. Financial markets are the ultimate arbiter of risk. What we have here is the 5yr Republic of Korea CDS which gives a rough guideline of how risk is being priced over time. Clearly unchartered waters at the time of GFC saw Korean risk leap to 700bps. The death of Dear Leader Kim Jong-Il saw around 240bps on the clock and Kim Jong-Un’s first nuclear weapons test saw a slight nudge over 100bps before sliding back to a standard 50bps range. Since Trump sent a carrier battle group and China issued an ultimatum (the ‘bottom line’) the rate has popped to 58.7 from 50-odd earlier in the week. It will be no surprise to see the fear factor rise in coming days but the odds are now on for China to take charge and work to install a pro-Beijing puppet which can be sold as a way to dismantle the nuclear threat and remain China’s protectorate. Kim Jong-Un may be offered a Rimowa of cash and an Idi Amin style exile in Saudi Arabia as a way to saving his hide because he has no alternatives and backing down in the face of the current situation will bring his power into question. China wants North Korea to survive for its political aims. For now markets are not panicking. Gold drifting higher and Korean won softening but it is hardly showing fear at this stage.

China send ultimatum to Kim Jong-Un

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As written yesterday in North Korean Roulette, “China has no choice but to step up to prevent the US giving it a bigger headache than it already has. Trump has clearly shown he is willing to pull the trigger when nations get out of line…Somehow China will be summoning Sun Tzu before it escalates out of its control.” So it appears China have overnight sent a ‘bottom line‘ threat to North Korea saying it’ll bomb their nuclear sites if crossed. According to the military-focused Global Times (owned and operated by the Communist Party’s People’s Daily newspaper), said that if the North impacts China with its illicit nuclear tests through either “nuclear leakage or pollution”, then China will strike hard. Taking out North Korea’s nuke arsenal would also win China credibility in neutralizing a global threat. Without nukes North Korea is a toothless tiger and Trump could end up with the result he needs by forcing Xi to act. That may well be to remove Kim and install a puppet. Korean CDS have edged slightly higher to 57.8bps but hardly showing fear. China is Kim Jong-Un’s biggest client. Best heed the warning.

North Korean Roulette

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In years gone past, North Korea used to up the ante on its belligerence when it needed a cash injection. Its neighbours tended to see that as the easiest way to put the Hermit Kingdom back in its place. Sure enough the North Koreans went away until the next ‘hit’ was required. China bought coal from North Korea to give it hard currency and prevent 20 million starving refugees trying to cross its border. It is no surprise that China has mobilized 150,000 troops to watch it. China has recently banned coal imports from North Korea to send a message that KJ-U’s antics can’t be tolerated. It may well be that the Trump/Xi dinner at Mar-a-Lago wasn’t clinking champagne but scoffing Red Bull over a chess board.

The chart above shows the extent of Kim Jong-Un’s thirst for missile testing. For a man willing to knock off his own brother, a man who looked as if he had no eyes on usurping Dear Leader, Kim Jong-Un will be an all or nothing trade. Cutting the head off this snake would plunge North Korea into deep crisis. It is highly likely that the many of the adoring generals all hate each other. Although China is likely to have a puppet in waiting.

The other problem is that all the while no action is taken, PyongYang’s arsenal grows more sophisticated. Eventually it will be sufficiently credible. In 1994 then President Bill Clinton came closest to taking action against its nuclear capability but in the end chose diplomacy.

On April 10, China’s special envoy on the North Korean nuclear programme, Wu Dawei, visited Seoul with the idea of pushing a harder UN resolution in case of another nuclear test. In the short term China is hoping a short term halt to coal imports will bring Kim Jong-Un to heel they have not ruled out removing him.entirely. It is the least preferred option but now Trump has dispatched a carrier battle group nearby China is being forced to up the ante.

Let us not forget the strategic benefits of North Korea to China. It provides a buffer to the US friendly South Korea and keeps China the dominant player geopolitically in the peninsula. However China must be thinking Kim Jong-Un is becoming more of a liability than an asset. How does it keep the strategic importance of North Korea in a palatable package that even Trump can tolerate?

North Korea has 3 main nuclear missile launch sites (Musudan-Ri,  Punggye-Ri and Tongchang-Ri) among the fourteen nuclear facilities ranging from R&D, power generation,  mining and refined fissile material production. A surgical strike would be difficult to achieve without North Korea getting away a few missiles itself. Naturally Japan would be a soft target for reprisal given its pacifist nature.

China has no choice but to step up to prevent the US giving it a bigger headache than it already has. Trump has clearly shown he is willing to pull the trigger when nations get out of line. Should he shoot one of Kim Jong-Un’s missile tests down to show he isn’t joking Kim will need to weigh up being a laughing stock by backing down or go down in a blaze of glory. Somehow China will be summoning Sun Tzu before it escalates out of its control.

One interesting take is the reaction on financial markets. South Korean CDS have jumped from 50bps to 57bps in recent days.  When Kim Jong-Il died these rates surged to 240bps from around 100bps. GFC by way of comparison was 700bps. The Korean Won has slid for 6 days running but it hardly looks like a collapse.

What did people expect? Understanding Middle Eastern politics

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One would have to be as isolated as a Japanese Imperial Army soldier discovered 40 years after the war ended to be surprised at Trump’s strike on Syria after a gassing. Do people honestly think drawing criticism from Iran or Russia is some mysterious happening? This is sadly the result of 8 years of impotent foreign policy which made America a laughing stock to despots. From Michelle Obama hashtagging Boko Haram on Twitter to release kidnapped school girls to allowing China to build man made islands in disputed territories.

Blowing up infrastructure in another sovereign nation is always going to create its own set of problems and questions. However the response from bully nations who have been used to running the school yard in recent times are naturally going to feel precious when given a taste of their own medicine.

As mentioned in the previous dispatch, geopolitical jigsaws aren’t first derivative. They’re usually 2nd,3rd and 4th interconnections.

Iran has long used Syria as a ‘highway’ into Lebanon to maintain influence in the region. Russia has only been too glad to be its arms supplier of choice. The Iranian Revolutionary Guard has been present in Syria for decades and ever since the Arab Spring has been making sure Assad keeps the highway open to Lebanon. Does it surprise you that Iran has been active in Yemen with the Houthi tribe to overthrow the Saudi loyal government in Sana’a and create instability in Riyadh?

When the US pulled out of Iraq in 2011 they left a huge power vacuum which was filled with pro-Iranian elements. Then Shi’ite Iraqi Prime Minister Nouri Al-Maliki had worked with the US to clean out pro-Sunni Saddam- loyalists and when Obama withdrew al-Maliki sold them out. He then accused the US of backing ISIS to reestablish a military presence in Iraq in 2014.

For Russia, Syria gives it a naval port and access to geopolitical weapons to exploit against the West. If the US puts missile defenses in Poland or the Czech Republic, Putin can flare up a crisis in the Middle East.

Saudi Arabia values Israel. Not on any religious grounds but as a buffer against Iran.  Far better to have a strong power act on their behalf than risk direct confrontation. It makes sense. Iran use Syria and Hizbollah to supply Palestine with rockets to nip at the heels of Israel and make them look like oppressors. That brings worldwide condemnation and led the likes of Obama to abstain from a vote to undermine a loyal ally.

So people need to separate fact from fiction. Trump is keen on reestablishing American dominance on the world stage. Foreign policy is never a pleasant or easy business when dealing with nations who have long histories and longer memories. The missile strikes in Syria were multi faceted. On one hand to counter chemical attacks. On the other to put Russia back in its box showing a new kid is on the block and Putin will gain far more being inside the tent pissing out than on the outside pissing in.

Of course the foreign ministries are sending strong messages of anger, condemnation and a halt to cooperation. That is page 1 section 1 of the manual. Cooler heads prevail and countries move to working out how to turn an ugly situation that allows Russia to keep skin in the game, the US to look tough again and the overthrow of Assad (he can live in Zimbabwe) without leaving a huge vacuum. In case you were wondering most of the pro-Iranian Syrian  Army top brass are Sunni. To them the luxuries they are afforded as elites outweighs their religious preference.

Markets will react. The mainstream media will dig up conspiracy theories and predict we’re on the brink of war but this is Trumps’s first message to the world – That guy you had for the last 8 years is no longer around. Things are different under new management.

Trump is unpredictable and whether we like it or not that actually makes the best leader to tackle such crises. One always has to second guess the real intentions of someone who can change on a whim.

Don’t believe the hype.