#northkorea

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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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.

Japanese school kids take up nuclear attack drills for the first time since the Cold War

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For the first time since the Cold War, Japanese school kids are practicing evacuation drills in the event of a nuke attack by North Korea. When five of the top 10 selling books in Japan were related to nationalism several years ago be sure that the feeling of protecting sovereignty is by no means taken lightly. Five years ago, at my previous company I wrote a four part series on the coming military tensions that are expected to occur in Asia. This is further proof things are going to continue to escalate. The Japanese Defense White Paper 2016 articulates why Tokyo is lifting military spending and changing from mere defence to attack capabilities. They’ve recognized the game has changed.

An excerpt from this 2016 White Paper reads,

“We are seeing an increasingly severe security environment surrounding Japan, as well as shifts in the global balance of power including in the Asia-Paci c region. Since the beginning of this year, North Korea has repeatedly conducted military provocations, such as a nuclear test and ballistic missile launches. Such military actions by North Korea constitute a serious and imminent threat to security not only of Japan but also of the region and the international community. At the same time, Chinese and Russian military forces have intensifed their activities in sea areas and airspace surrounding Japan. In the East China Sea, Chinese government vessels have repeatedly intruded into Japanese territorial waters and have been engaged in activities that are seen as promoting the Chinese government’s own assertions regarding the Senkaku Islands. In the South China Sea, China has continued large-scale and rapid land reclamations, established outposts, and utilized them for military purposes. By unilaterally altering the status quo and attempting to turn it into a fait accompli, these actions heighten tension in the region…

…Against this backdrop, the Ministry of Defense (MOD) / the Self-Defense Forces (SDF) has a responsibility to assume any situations and take seamless responses in order to resolutely secure the lives, property, and freedom of the people as well as Japan’s territorial land, water, and airspace. The legislation for peace and security was passed in the Diet last year and entered into force this March. This legislation enables Japan to strengthen its ability to prevent wars from occurring, i.e. its deterrence, and implement seamless responses. To ensure that our deterrence functions adequately, it is essential that Japan continues to build a more effective Dynamic Joint Defense Force that is ready to respond to various situations appropriately.”

Note now that Japan has a first strike capability to ensure its safety. No longer does it have to be punched in the nose if it sees threats are imminent. As peaceful as Japan is today, sadly it bears deep scars not forgotten by its neighbors during the imperial years in the 1930s and 1940s.

North Korea only serves Abe’s need to justify constitutional change

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Japanese PM Shinzo Abe is spot on in his want to change the constitution to allow Japan’s “defence forces” to act to address threats it faces today. When the pacifist constitution came into force after WW2 the security threats were minimal.  US might in the region was unquestioned and uncontested. Scroll forward today and the game has changed. The US is clawing back and consolidating its military bases in Asia. The Russians are conducting regular flights around Japan to test Japan’s minimum jet scramble times, China’s exerting its power in Asia building man-made island military bases testing and proving the weakness of Obama and now North Korea tests another nuke.

Abe is sensibly looking to act before it’s too late. He’s trying to get “preemptive strike” into the constitution to allow Japan’s military to protect against threats. Japan knows it needs to do more of its own heavy lifting. There is no nationalism in the motives. It is common sense.  The 2015 Defence White Paper highlights very clearly that Japan’s security dynamic has dramatically changed and the ability to respond is completely out of date.

The natural course of events in Nth Korea is to stir up noise to get cash in the door to keep the hermit kingdom going. The threat isn’t just about whether they look to nuke Japan or Sth Korea but selling their crappy technology to non state actors. They’d already been busted for trying to do things with Syria via Iran.

Japan knows conplacency is the true enemy.