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The market should take Trump seriously this time.


Kim Jung-Un gave the U.S. an unwelcome birthday present as he test launched an ICBM capable of reaching Alaska.  North Korea has made it very clear that their intention is to grow their nuclear capability to be able to reach the Continental United States.  This would destabilize the region, and world overnight.

Now I don’t expect the war drum beating will spill over into mortar shells raining down on Seoul anytime soon.  There has been a choreographed diplomatic dance going on for the past 40 years with North Korea that is likely to continue as follows; North Korea acts out, U.S. gets upset, U.S. sanctions them (with help from China).  North Korea gives up their acting out activity (promises they won’t do it again), a North Korean South Korean gesture of goodwill takes place, such as joint Olympic teams, joint economic projects, North Korea gets to declare victory.

However, this go around seems slightly different.  Now we have a President who has made it very clear in his campaign that China is taking advantage of the U.S. on trade and seems unlikely to give in to China to make it worth their while to sanction, or even threaten to sanction North Korea.

This morning the president tweeted…

“The United States made some of the worst Trade Deals in world history. Why should we continue these deals with countries that do not help us?

Trade between China and North Korea grew almost 40% in the first quarter. So much for China working with us - but we had to give it a try!

This is a clear shot across the bow to China, from the United states, saying you need to stop trading with North Korea or the U.S. will respond.  The market has brushed this off as another silly thing our president tweeted.   But this is something as a republican candidate for president Trump had campaigned hard on.  He called China currency manipulators, said that the U.S. trade policies were a laughing stock, and that he would change that.

I have not seen any predictions on what actions the United States might take against China, but many have predicted what would happen to the global economy if China’s growth slowed down.  Ironically it would hurt South Korea the most, since trade with China in South Korea makes up a large percentage of their GDP.  It would also seriously hurt Australia and Russia, who are large exporters of the raw materials China needs to fuel their growth.  The ripple effects beyond that are uncertain, by comparison, a smaller ripple caused the 1997 Asian financial crisis.  In 1997, easy to forget, we saw the VIX spike to 48 at the peak of the crisis. 


And how would China respond?  As the largest owner of U.S. Treasuries, they have their own trump card to play.   Bottom line, the market is blowing off any threat the Korean Peninsula might bring.  It is clear the U.S. can not sit back any longer and wait while North Korea gets closer and closer to being able to wage a preemptive nuclear strike.  As of right now, China is not motivated to stop them.  But until we act, China can have its cake, and eat it too.

Joe Tigay
7/5/17

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