Geopolitics

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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China data leaves warmists in the cold

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As far as curioisity on any subject goes if 19 out of 20 agreed and one dissented wouldn’t you wish to work out why the lone body thought that way? Is he or she mad? On what grounds? Do we simply suck up the consensus and accept it? That’s worked well over time. Well the Chinese Meteorogical Administration has dropped a bombshell on the warmists confirming there has been no statistically significant warming since 1998. The CMA put forward the following analysis,

“In preparing the new database…the CMA say they addressed a number of problems with other surface temperature databases, in particular the relatively poor coverage of stations across Antarctica, Africa, South America, and Asia. They note that the IPCC AR5 report concluded that the warming trends in these regions are associated with a lower confidence level. They also improved the absence of early period stations, especially before 1940….The researchers find very clear evidence for the recent warming hiatus. Their results show linear trends of 0.104 °C per decade, 0.247 °C per decade and 0.098 °C per decade for the three periods, respectively. The trends were statistically significant except for the period 1998–2014, the period that is also known as the ‘‘warming hiatus”.

I would imagine Premier Xi will listen to his internal CMA over others when setting climate abatement policy. Maybe 2030 becomes 2040 or later…so why are so many governments engaged in group think where they clearly fail to heed reality? Perhaps they are so knee deep in their own poor policy decision making that they don’t want to admit they’ve acted in haste. South Australia and Tesla anyone?

Poles apart

Once again how the social media feeds lit up with the supposed snubbing of President Trump by the Polish First Lady. If people took five seconds to come out of the sandpit and  objectively analyze her actions they’d see without deliberate video editing she clearly shook his hand immediately after she shook FLOTUS’s hand. It is pretty easy to work out why so many click bait media organizations are floundering. There is no intelligence or effort to be objective. Sadly one is forced to doubt almost every meme of this kind. It makes tabloids look like professorial theses by comparison. Even the Polish PM came out tweeting it was “FAKE NEWS”

Earlier in the week media were trying to claim he got lost on the way to his limousine when he alighted Air Force 1 as if to claim he was suffering from a mental disease. No doubt trying to add some credibility to the Democrats trying to seek his removal for a lack of mental faculty.

He is without doubt unconventional, often unstatesmanlike, at times shows a lack grace/eloquence and narcissistic (his round table where cabinet members professed their love for him was pretty nauseating) but reading his speech (even if composed by his speech writer – which president doesn’t?) in Warsaw, Trump spoke of what many of today’s apologist leaders refuse to. He believes in the idea that it is totally acceptable to defend your own values and culture. That people shouldn’t be pilloried for feeling patriotic. This week we’ve seen Trudeau offer a state apology and $10.5mn compo payment to a convicted terrorist.  Several months ago Canadian Bill M-103 was passed in such a way that free speech is gagged toward a specific minority. Australia tinkers at the edges of the draconian 18C and still bothers to invest in the AHRC which has shown itself to be an absolute waste of time, resources and worst of all a wrecker of the reputations of innocents. Germany arrested a good samaratin that released a video showing migrant violence toward an innocent victim on grounds of breaching privacy laws and the women of Cologne were advised to wear less revealing clothing to avoid being pestered. We could go on for ages. Is this defending culture? Thinking we gain acceptance by denying our own identity? I applaud Trump for making valid points about pride in one’s nation, something the gritty Poles know all too well.

There are many things not to like superficially about POTUS but when it comes to asking harsh questions about a fair share of funding for NATO or the UN, citing legitimate reasons for ditching the Paris Climate Accord or poking China to start dealing with its geopolitical chess piece in North Korea, he is speaking truths his predecessor would never broach. Sure he has much work to do at home but the world can’t help but notice the new sheriff in town on the global stage and boy do we need strength in this department after eight hollow years where countries like China and Russia ran amuck.

Yet when all is said and told, the mainstream media remains too busy trying to create stories/scandals with concocted outcomes by editing out the facts to create ‘ gotcha’ scoops which achieves their goals of personal hatred. Fake news? That term is getting overused. The fake part may be right but the news part isn’t.

From Sesame to Elm Street

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ETF markets continue to surge in popularity. With low fees and basic packaging of the ETF product even Big Bird can understand what The Count is going on about. No wonder investors are snapping up these products faster than the Cookie Monster. However there is something chilling about the ETF market. In the lead up to and eventual crash of Lehmans et al CDOs, CDSs and other synthetic products were seen as the root of all evil. They were so complex that even Fields Medal winners in mathematics couldn’t make head nor tail of them. The ETF became the opposite – being too simplistic – and with that the product has brought huge complacency. To that end Sesame Street could well switch to Elm Street.

Today assets invested in ETF/Ps comprise over $3 trillion globally. Put simply the new funds flowing into ETFs vs. traditional mutual funds is at a 100:1 ratio and in terms of AUM is on par with total hedge fund assets which have been in existence for 3 times as long.

However ETFs, despite increasing levels of sophistication, have brought about higher levels of market volatility. Studies have shown that a one standard deviation move of S&P500 ETF ownership carries 21% excess intraday volatility. Regulators are also realising that limit up/down rules are exacerbating risk pricing and are seeking to revise as early as October 2015. In less liquid markets excess volatility has proved to be 54% higher with ETFs than the actual underlying indices. A full report can be seen here.

With the continuation of asset bubbles in a TINA (there is no alternative) world, ETFs in my view will lead to massive disappointments down the line. Their downfall could well invite the revival of the research driven fund manager model again as robots show they’re not as infallible as first thought in managing the volatility. Don’t forget humans designed the algorithms.

There is also the added risk of whether some ETFs actually hold the physical of the indices or commodities they mimic. A gold ETF is a wonderfully good way to store wealth without resorting to one’s own bank vault but how many ETF owners have inspected the subterranean cage that supposedly holds the physical the ETF is backed by? Has it been lent out? Does it own a fraction of stated holdings? It could be any other commodity too. Of course the ETF providers bang on about the safety of the products but how many times have we gasped when fraud reared it’s ugly head right in front of us. Bernie Maddoff ring any bells?

Given the implied volatility on the downside we need to bear in mind the actions of central banks. The Bank of Japan (BoJ) is the proud owner of 60% of the ¥20 trillion+ domestic ETF market. While the BoJ says it isn’t finished expanding its world’s largest central bank balance sheet (now 100% of GDP), the US Fed is looking to reduce its balance sheet by over 40% in order to normalize. While one can applaud some level of common sense pervading sadly the consequences of defusing the timer on the bomb they created at a period when the US economy is showing signs of recession will only be an overhang on asset markets. Should the US market be put through the grinder, global markets will follow.

It is one thing for the Fed to be prudent. It is another for it to be trying to cover its tracks through higher interest rates in a market that looks optically pretty but hides serious life threatening illnesses. The Fed isn’t ahead of the curve at all. It is so far behind the 8-ball that its actions are more likely to accelerate rather than alleviate a crisis. Point to low unemployment or household asset appreciation as reasons to talk of a robust economy but things couldn’t be further from the truth. Wage growth is not the stuff of dreams and the faltering signs in auto, consumer and residential markets should give reason for concern.

Since GFC we have witnessed the worst global economic revival in history. The weakest growth despite record pump priming and balance sheet expansion. Money velocity is continually falling and the day Greenspan dispensed with M3 reporting one knew that things were bad and “nothing to see here” was the order of the day.

Record levels of debt (just shy of $220 trillion or 300% of GDP when adding private, corporate and government), slow growth, paltry interest rates and coordinated asset buying have not done anything other than blown more air into a bubble that should have been burst. GFC didn’t hit the reset button. Central banks just hit print to avoid the pain. We’ve doubled up on stupidity, forgot the idea of prudent and sensible growth through savings and just partied on. Ask any of your friends in finance what they “really” think and I can assure you that after a few drinks they’ll tell you they’re waiting for the exit trade. They know Armageddon is coming but just don’t know when

Whether we like it or not, the reset button will be hit. I often argue people should not worry about the return ON their money but the return OF it. Global markets can’t be bailed out again with massive cash infusion. That has been a recipe for disaster, only widening the gap between haves and have nots. Debt must be allowed to go bad, banks must be allowed to go bust and free markets must be freed from the shackles of state sponsored manipulation to set prices. It will be ugly but more of the same can kicking won’t work.

ETFs are a sign of the times. They represent the slapdash approach to life these days. Time saving apps if you will. However nothing beats hard nosed analysis to understand what awaits us. Poor old Big Bird will be the canary in the coal mine and Sesame Street will be renamed Elm Street as the Kruger’s move in to give us nightmares Janet Yellen assures us aren’t possible.

Perhaps that is the ultimate question. As you go to work each day do you honestly feel that things are peachy as the management town hall meetings would have you believe? Are your friends or colleagues all bulled up about the future? Perhaps that is easier to answer than an ETF.

Her Majesty knows best Mayor Khan

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Isn’t it funny how the Mayor of London Sadiq Khan has been gazumped by the Queen. Her Majesty has served her country for over 65 years and ruled over 14 Prime Ministers. Let’s just say her understanding of politics, geopolitics, terrorism and the importance of long term relationships has never got in the way of short term pettiness. The Queen values the American relationship knowing it was their partnership that helped Great Britain defeat the Axis powers in WW2. She never forgets the important times when the relationship has truly mattered. Her extension of an invite to President Trump to Buckingham Palace is all about preserving shared values. Khan wants to cancel Trump’s visit because he is offended by his tweets with regards to his softness on terrorism in his city. Is Trump wrong?

Instead of the Mayor facing Trump tete-a-tete and justifying his stance he seeks to do what many leaders in the West do – sulk and seek to alienate the relationship because of their weakness. What Trump has said about Khan has validity. The President isn’t conventional and he doesn’t necessarily deliver in the most courteous manner but where is the counter argument? Piers Morgan was spot on. Instead of Khan blaming Theresa May for Met Police funding cuts, he humiliated the Mayor querying isn’t his biggest responsibility to ensure the safety of Londoners by monitoring the 400 suspects living in his constituency?

Let’s be clear, if the UK was at war for whatever reason you can be guaranteed the majority of the British want America on their side. The Queen knows this and I’m sure Her Majesty can bring Trump to mutually beneficial discussions rather than exchange pleasantries over tea. All this nonsense about banning Trump and distancing the UK from the US shows the typical “conditional” attitudes our society seems increasingly willing to tolerate. Khan is in that camp.

Let’s be clear. Trump’s America first isn’t all about pure isolationism. A large part is about making sure other nations don’t ride their overwhelming generosity on things like NATO, UN or the Paris Climate Accord. Many presidents to date have happily allowed the country to be gouged on the international stage but now the budget and deficits don’t support endless freebies for other nation states.

Perhaps Mayor Khan should learn from the current monarch about true values rather than  grizzle about his hurt pride. She maybe in her 90s but she is still sharp as a tack.

America IN or OUT makes no difference to a dud Paris Climate Accord where 75% aren’t onboard anyway

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Across social media there are dozens of posts from Americans apologising to the world for abandoning the Paris Climate Accord. “There are millions more like me.” Yes you are probably right but there are millions like him too. What people should question is the ‘real’ commitment to the accord. If we were to replay the video tapes of the Paris COP summit we were hearing wails and gnashing of teeth that there was no agreement pending. Then in the final throes we were led to believe that an agreement was reached. The joy! The triumph! We did it! Here is the catch! It was agreed by ‘politicians’ not ‘scientists’. Politicians are renowned over the millennia to making compromise and commitments way beyond the scope of their likely hold on power.

Climate commitments are the ultimate level of virtue signaling and tokenism. Politicians can say in their legacies that they tried to save the planet for their great grandchildren even if nothing is achieved. Remember how the long held 2 degree upper limit target was  heralded as a no quid pro quo line. At Paris it became 1.5. In order to accelerate alarmism the upper band had to be cut to get countries to redouble their efforts. All of a sudden, decades of climates science that told us that 2 was acceptable (bearable) became 1.5 degrees with the stroke of a pen.

As I wrote yesterday, the garage of your neighbour was more telling of individual climate commitment. In Australia one energy company offers a service which gives you the opportunity to pay a premium over fossil fuel based power to source your energy in green form. Take up rate? Less than 5%. Who elects to tick the carbon offset box when they fly commercial? I don’t think many airlines even bother with this such is the low take up. Not to mention carbon calculators are so inaccurate. A passenger has no idea what the load factor, headwinds/tailwinds, holding patterns and conditions en route are that the figure you pay would be more accurate if spewed out of a bingo wheel.

Let’s check reality of the climate game. 75% of the evil gas that helps plants grow are caused by 4 countries – America, China, India and Russia. Let’s tackle them one by one.

America. Well the commitment to the Accord was so flimsy to begin with, It was laced with out clauses such as being exempt from being sued for any environmental damage caused in the past or future. Obama decided to tick the box himself after lawyers breathed on the fine print – remember the US was the last to commit.

China. China, China, China. The commitment is so robust they don’t have any intention to  get serious until 2030 (likely peak emissions). China has explicitly said it will raise the coal share of power to 15% by 2020 from 12% and this will keep climbing. China’s pollution problems have stuff all to do with global warming but public health however it can virtue signal under the banner of climate change mitigation and win brownie points.

India. The construction of 65 gigawatts worth of coal-burning generation is under way with an additional 178 gigawatts in the planning stages in India will mean they’ll not achieve Paris targets.

Russia’s commitment at Paris would have been more serious if drafted on a hotel napkin such was its lack of substance. 4 pages of nothing.

The accord is worthless. It was rushed at the end by bureaucrats not scientists. If it is really such a binding pact there will be no need to have 50,000 climate pilgrims kneel at the altar of the next religious cult meeting. They should thank America for its action because it will guarantee the hypocrites get to keep the junkets in exotic tourist locations going.

To double up on the stupidity, hearing virtue signaling politicians blather about remaining committed to a target that is now so fundamentally broken shows how untenable it is. Think about it. If America (at c20% of the supposed problem) quits then the remainder of countries have to fill in the gap not stick to existing commitments, Sure Merkel said she’d up Germany’s targets to offset the evil Trump which is pretty unachievable given the already high level of renewables.  China said they’d chip in but don’t think those comments are any more than empty platitudes trying to puff up the image of commitment when economic resuscitation is priority #1.

The irony is that Trump said he’d consider another deal. Another deal is what is needed. Because as it stands, the Paris Accord has all of the hallmarks of political manifestos across the globe – uncosted  broad based promises made against flimsy but overwhelmingly positive/negative assumptions.

So before I read more garbage about Americans having an imperative to take power back, perhaps they should examine the realities rather than the figment of imagination floating around inside their heads. Millions more like you is actually the problem why the message never gets sold properly.

Climate sceptics are idiots by association

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Burn this image in your head first. It is Tokyo today. As you can see for such an evil carbon emitting industrialized nation as Japan the skies are blue as any you’d find in Australia. Ironically Japan is a country often selected as a country that must pay into the climate change pot for its sins rather than get a pat on the back for its ability to be clean and productive. So it was no surprise that once again I read the bias in the press reporting from the G-7. Because Trump is a climate sceptic and disagrees with the other 6, articles tried to use this as a reason to beat up on those who won’t bend to the will of the alarmists because he is in their view – an idiot. The inference is that all climate skeptics must be fools by association. Exactly the same garbage at the time of Brexit. A table circulating with Trump, Farage, Putin and other ‘undesirables’ supporting Leave and Obama, EU officials and bodies like the NUS and Greenpeace backing Remain. Then we get the result of the referendum.

I will openly admit that the President has many flaws but to use this as a basis of driving the climate change agenda is pathetic. One article blathered on about his lies (hardly news) and then made the reference to “universally accepted science” which is a huge porky in itself. It isn’t settled. One of the reasons it isn’t settled is down to the data manipulation, amateur hour ethics of bodies like the UNIPCC, NOAA and numerous universities with agenda driven studies numerous of which numerous have been exposed for fraud. Climate alarmism is nothing more than wealth redistribution as the above picture highlights.

If indeed it is universally accepted why bother investing billions of side-by-side research papers to formulate the same outcome? What we have is the construction of multiple rail lines built next to each other operating each at 10% capacity. It is such inefficient capital allocation. Why do we need 50,000 climate disciples flying annually to mega junket tourist locations all to kneel at the altar of the COP summits. This could be delegated to 1% of that number. It shows at the very least that the disciples are the biggest hypocrites. If the science is so settled and everyone is so universally on board as they claim then there is no need to keep twisting the truth to squeeze more funds to prove what we already (supposedly all) agree on.

Seeing Merkel make an argument about 6 countries in favour of following through with the Paris Agreement and America against is laughable. Is America, or at the very least its President required to follow consensus for the sake of group think? Is global politics now reduced to going with the flow? Should dissenting opinions be treated like conservative speakers at universities? This is exactly why it is so hard to respect the current crop of global leaders. One seriously doubts that they truly believe it outside of it being an agenda item to secure votes. Climate alarmism is the socialism of the 21st century.

So perhaps the ‘idiots’ are the ones that can’t escape the pre-formed bias against America’s Commander-in-Chief. Talking about German car imports (when many BMWs and Benz’s are built in the USA) and other gaffes don’t really do him favours but if the media wants to take the moral high ground at the very least they can balance the views on the climate debate (and others) and admit the multiple self-inflicted wounds and inaccuracy of decades of forecasting models where 98% have proven wildly off target. It reminds me of compliance seminars in my old industry. We’d fly in compliance officers to train us about the penalties and Big Brother! We’d focus on the evils of all our competitors and the punishment meted out to them. I asked a simple question – “why don’t we use compliance breach examples from our own company and the manner in which we dealt with it as a matter of getting people aware of being a responsible corporate? Can we honestly say farts don’t smell?” It sums up the climate alarmists perfectly. Everyone else is at fault and everything we do is virtuous, honest and worthy of self-praise.