First to markets: We have raised a cash reserve in US ETF portfolios, and we are realigning bonds now that credit spreads are tightening and yields are low as quality flight occurs. We have rebalanced gold miners using an ETF. We remain overweight the financial sector and defense sector using selected ETFs. That strategy was underway before the North Korea story made the top of the news, and that strategy is validated by it.
Now let’s offer some commentary about North Korea and war risk.
It was a coincidence of timing that had me seated with Alix Steel and David Westin on the set at Bloomberg TV on Wednesday morning, August 9, after the POTUS versus North Korean dictator Kim Jong-un bellicosity ripped up the script. Here is the TV clip link about markets and war: (bloomberg.com/news/videos/2017-08-09/cumberland-ceo-warns-of-great-n-korea-market-risk-video).
Right before this clip the anchors had posted the similarly dire warning President Harry Truman made regarding Japan on August 6, 1945, some 16 hours after the US had dropped an atomic bomb on the city of Hiroshima: “If they do not now accept our terms they may expect a rain of ruin from the air, the like of which has never been seen on this earth.” (newsweek.com/trump-north-korea-threat-truman-hiroshima-648304)
Though Trump’s message to North Korea, promising to meet North Korean threats “with fire and fury like the world has never seen,” is similar in intensity to Truman’s language directed toward Japan at the culmination of WWII, the circumstances are vastly different. In 1945, the United States had spent years engaged in a world war, had secretly developed the world’s first nuclear weapon, and had used it at Hiroshima. President Truman’s threat was credible because he had taken action.
President Trump, however, is in an entirely different place. He has, as president, established a pattern of tweeting bellicosity and messaging without consistency, and his administration was clearly unprepared for Trump’s ad-libbed threat. Secretary of State Tillerson tried to walk back the Trump statement by saying, “I have nothing that I have seen and nothing that I know of would indicate that the situation has dramatically changed in the last 24 hours. Americans should sleep well at night.” (cnn.com/2017/08/09/politics/north-korea-donald-trump/index.html)
Senator John McCain, who chairs the Armed Services Committee, reacted to the Trump statement with concern: “I take exception to the President’s comments, because you’ve got to be sure that you can do what you say you’re going to do…. The great leaders I’ve seen don’t threaten unless they’re ready to act, and I’m not sure President Trump is ready to act.” (axios.com/mccain-trumps-threat-to-north-korea-very-very-very-serious-2470752413.html)
Trump’s warning to North Korea put US Defense Secretary James Mattis in a particularly difficult position. Mattis has long advocated a diplomatic approach to dealing with North Korea because of the potential for catastrophe should conflict escalate. He issued a follow-up warning to North Korea on Wednesday, August 9, to discourage an overreaction: “The DPRK should cease any consideration of actions that would lead to the end of its regime and the destruction of its people,” Mattis said. Here is a link to his entire written statement: defense.gov/News/News-Releases/News-Release-View/Article/1273247/statement-by-secretary-of-defense-jim-mattis/.
Meanwhile, North Korea dismissed Trump’s warning as “a load of nonsense” and said it was pushing ahead with its plan to launch four missiles that would overfly Japan and land near Guam. North Korean media released the following statement:
“General Kim Rak Gyom, commander of the Strategic Force of the Korean People’s Army (KPA), released the following statement on 9 August.
“As already clarified, the Strategic Force of the KPA is seriously examining the plan for an enveloping strike at Guam through simultaneous fire of four Hwasong-12 intermediate-range strategic ballistic rockets in order to interdict the enemy forces on major military bases on Guam and to signal a crucial warning to the US….
“On Tuesday, the KPA Strategic Force through a statement of its spokesman fully warned the US against its all-round sanctions on the Democratic People’s Republic of Korea (DPRK) and moves of maximizing military threats to it.
“But the US president at a gold [should be “golf”] links again let out a load of nonsense about ‘fire and fury,’ failing to grasp the on-going grave situation….
“Sound dialogue is not possible with such a guy bereft of reason and only absolute force can work on him. This is the judgment made by the service personnel of the KPA Strategic Force.
“The military action the KPA is about to take will be an effective remedy for restraining the frantic moves of the US in the southern part of the Korean peninsula and its vicinity….
“The Strategic Force is also considering the plan for opening to public the historic enveloping fire at Guam, a practical action targeting the U.S. bases of aggression….
“The Hwasong-12 rockets to be launched by the KPA will cross the sky above Shimane, Hiroshima and Koichi Prefectures of Japan. They will fly 3 356.7 km for 1 065 seconds and hit the waters 30 to 40 km away from Guam.
“The KPA Strategic Force will finally complete the plan until mid-August and report it to the commander-in-chief of the DPRK nuclear force and wait for his order.
“We keep closely watching the speech and behavior of the US.” (NightWatch)
Having issued his warning and seen a response, Trump now faces a daunting task. Doing nothing invites more threatening behavior from Kim Jong-un, who is an unpredictable despot. Doing something has risk attached no matter what the something is. For the United States this issue of North Korea and nukes is a classic Hobson’s choice of the worst kind. Yet today Trump affirmed his tough talk, saying, “If anything, maybe that statement wasn’t tough enough” (cnbc.com/2017/08/10/trump-maybe-fire-and-fury-statement-on-north-korea-wasnt-tough-enough.html).
Clearly, America is building the military coalition it needs to respond to Kim’s threat, as demonstrated by this report from Guam:
PACIFIC (GUAM) DAILY NEWS: “The U.S. Air Force has said that members of the 37th Expeditionary Bomb Squadron, deployed to Guam from Ellsworth Air Force Base in South Dakota are ready to ‘fight tonight’ from Guam. During a 10-hour mission from Andersen Air Force Base, Guam, on Monday, two B-1s were joined by Japan Air Self-Defense Force F-15s as well as Republic of Korea Air Force KF-16 fighter jets. ‘These flights with Japan and the Republic of Korea (ROK) demonstrate solidarity between Japan, ROK and the U.S. to defend against provocative and destabilizing actions in the Pacific theater,’ according to a release from the Air Force.” (Politico)
Meanwhile, Iran, a longtime North Korea ally, is paying close attention to the unfolding of events. See nydailynews.com/opinion/player-north-korea-crisis-iran.
So what happens next? A good outcome is a China intervention and a Kim Jong-un exit and regime change. But we all know hope is not a strategy, and waiting for China or depending on China’s assistance is fraught with complications and additional risks.
Do we utilize a naval blockade? Shoot down missiles when they’re launched? Engage in other limited actions? All options risk a full shooting war, with South Korea in range of North Korean artillery.
Do we do nothing and hope that a nuclear-armed North Korea would restrain itself, as Pakistan and India have? What evidence do we have that supports such a hope?
Our view is that hope fails as a strategy. And allowing North Korea to advance its missile and nuclear capabilities raises the odds that it will sell them to other rogue nations or terrorist organizations.
We in America face a serious risk and a Hobson’s choice — an awful combination that requires all the collective wisdom and leadership our nation can assemble.
We will close this note with the full situational analysis offered by George Friedman, who graciously gave us permission to reproduce it. His website is https://geopoliticalfutures.com/.
We thank George for allowing us to share this piece in its entirety with our readers.
North Korea, Nukes and Negotiations
By George Friedman
The narrative about North Korea, a narrative I believe to be true and have since early March, is simple: The North Koreans have reached a point in their nuclear and missile programs where they could soon have the capability to strike the United States. The U.S. isn’t prepared to let itself be vulnerable to the whims of what is seen as a dangerously unpredictable regime in Pyongyang. Therefore, the U.S. is prepared to strike at North Korea’s nuclear and missile facilities.
At the same time, the U.S. is extremely reluctant to attack. The nuclear program sites are dispersed and hardened, making airstrikes difficult, and North Korean artillery concentrated near the demilitarized zone could devastate Seoul. So as it considers not just whether a strike should be made, but whether one is even possible, the U.S. has been trying to motivate China to use its influence in North Korea to get Pyongyang to halt its weapons development. The U.S. position is that a strike will take place if diplomacy fails, but also that a conflict with North Korea would be difficult, dangerous and potentially devastating to allies. Thus, the U.S. is postponing such an action as long as possible.
As time passes, it is important to re-examine old assessments. The United States didn’t suddenly in the last few months conclude that an attack on North Korea was dangerous. The Americans had to have known the North Korean nuclear development program was dispersed and hardened, and they have publicly spoken about the artillery threat to Seoul. But they might have been galvanized by indications that the North Koreans had a miniaturized and ruggedized warhead and were close to having an intercontinental delivery capability. Given the degree of U.S. focus on North Korea, however, the appearance of sudden apprehension is odd.
One way to look at this is that the North Koreans were also aware of the hurdles involved in attacking them and knew that the U.S. would hesitate. They therefore decided to rush forward to complete a weapon that would threaten and deter the United States at a time when U.S. relations with Russia and China were unstable and the new American president hadn’t yet settled in. They saw an opening they could push through to complete their weapon and hold the United States at bay.
The problem with this theory is that North Korea didn’t really need to keep the U.S. at bay. The U.S. has no real interest in North Korea. It has no desire to overthrow the regime, to reform it, to trade with it or to visit it. The idea that a nuclear weapon would make North Korea safer was dubious, and the regime must have known that. Since 1953 and the armistice, the U.S. was formally hostile and practically indifferent toward North Korea. On the surface, it would seem that North Korea had more to fear from actually threatening the United States.
In thinking about this, I have begun to reconsider a model that I had used to explain U.S.-North Korea relations since the 1990s until this past March and the beginning of this crisis. That model is what I call North Korea’s “ferocious, weak and crazy” posture.
Ferocious, Weak and Crazy
This strategy emerged after the fall of the Soviet Union and the transformation of China from a nation hostile to the United States into one that depended on it for trade. North Korea found itself in an extraordinarily dangerous position. Japan and South Korea were seen as hostile toward it, if passive. Russia was incapable of protecting it, and China had bigger fish to fry. The U.S. was emerging as a global power, no longer challenged by other great powers. North Korea was isolated, and in its mind, the U.S. was rampaging and toppling regimes of which it didn’t approve. There was no reason for it to think North Korea wouldn’t be a target. Pyongyang’s goal was regime survival, and guaranteeing that was enormously different.
The solution was to position itself, at least in perception, as something not to be disturbed. First, the North Koreans sought to appear ferocious. At the beginning, they accomplished this with their massive military (however poorly armed) and by zeroing their artillery in on Seoul. True, they had limited resources, but the fanatical nature of the regime and its forces made the country appear dangerous and powerful beyond its means. Fanaticism was its force multiplier. No one wants to mess with a fanatic unless they have to, and no one had to.
The second element of the plan, paradoxically, was to look weak. The famines of the 1990s were real, but they also made outsiders believe that the regime had only months to live. The regime knew better. It knew that the internal ferocity could be sustained and that unrest would not turn into an uprising. But from the outside, it appeared that the regime was tottering. If the regime were on the verge of collapse, why should anyone take the trouble of bringing it down? Weakness was a deterrent.
Finally, the North Koreans said things that made them appear insane. They acted as if they could destroy the world, threatened the U.S. with annihilation, and occasionally sank a ship or blew up a group of South Korea diplomats. Ferocious as they were, why take the risk of engaging them? Weak as they were, why bother? Crazy as they were, prudence dictated avoidance.
In this theory, the decades-long nuclear program fit in. Having nuclear weapons might invite military counters, but working on nuclear weapons fit with the doctrine of ferocity. North Korea’s weakness made it appear as though it were a futile attempt. Its insanity made it seem like another act of frivolity. Guarded by those principles, the North Koreans could develop a nuclear force.They could also use their nuclear program as a negotiating tool and a way to inflate their importance. The United States didn’t want North Korea to even try to develop nuclear weapons. Success might be distant, but the risks were high. Since military action was not a reasonable option, extensive negotiation took place to convince North Korea to give up its program. The U.S. put together a group consisting of itself, Japan, South Korea, China and Russia to negotiate with North Korea. Step back and observe the brilliance of Pyongyang’s strategy. An impoverished tyranny was sitting across the table from five major powers that treated it not only as an equal, but as the equal of all five powers together. The effect on domestic perception had to be electric. It had been crazy to speak of North Korea as a great power; now the negotiations confirmed its place.
There were other benefits as well. Periodically, North Korea won material concessions from these countries in return for halting its program. This was certainly the case when the North Koreans took the benefits, resumed their program and returned to the negotiating table for another round of affirmation and aid.
The Mother of All Negotiations
But there was one principle embedded in this strategy: North Korea would have a nuclear program but not obtain a deliverable weapon. The former allowed it to manipulate great powers; the latter could bring catastrophe, even at a high price to the attacker. In March, it began to appear that the North Koreans had abandoned the key element of this strategy. Rather than a perpetual program, they were actually going to get nuclear weapons. They appeared very close to having one – mere months away – and they did this very publicly.
Yet consider this: They may get a deliverable nuclear weapon, but they acknowledge that they don’t have one yet. Perhaps at this point they can’t be more secretive than they are, but the fact is that they are waving warning flags for all to see. The military balance makes the U.S. extremely cautious about an attack, the South Koreans horrified at the thought, the Japanese ambiguous, and the Chinese and Russians hostile. The North Koreans look at the group they had negotiated with before, and they undoubtedly wonder whether the U.S. will act.
Certainly, the U.S. must be cautious. The North Koreans are ferocious, still a small, weak power in most ways, and crazier than ever, threatening to set the U.S. on fire. Therefore, ask this question: Do the North Koreans truly intend to obtain a nuclear weapon, or to come so close that it is within reach? Having gotten close, do they mean to set up the ultimate negotiation in which they exact massive concessions from the United States and others, including diplomatic recognition, economic concessions and perhaps even a type of confederation with South Korea in which the benefits flow north? After all, South Korea stands to lose the most if there is a war. Perhaps the South would consider some sort of deal?
North Korea doesn’t know what it can get, but one interpretation is that it is creating the framework for a negotiation in which it holds all the cards. The North Koreans likely can’t get all of what they can imagine, but given the American fear of North Korean nuclear weapons, the South Korean fear of war, and tensions between China and the U.S., the Americans would have to consider not only a nuclearized North Korea, but also a North Korea supported by Russia and perhaps China. The public American statement on the reluctance to go to war and its constant search for a diplomatic solution might convince North Korea that it is on the right track.
This is not a forecast but a consideration of an oddity. North Korea exposes itself to more risk by obtaining nuclear weapons. It increases its leverage by being close to having them but not actually having them. The value of nuclear weapons is low; the value of a program has always shown itself to be high. The more reluctant North Korea is to talk, the crazier it appears, and the crazier it appears, the more at a loss the United States is as to how to deal with it. According to this theory, those who argue that there is no military option and that we must accept North Korea as a nuclear power may actually have a point, but it’s not the point they think. If the U.S. accepts a nuclearized North Korea, North Korea will be the dog that chased a car and caught it, and will now have to figure out what to do with it.
I continue to think war is the most likely outcome. But as time has gone on, I’ve noted the complexities of such a war for the United States and have recalled other, much less extreme moments when the North Koreans used their nuclear program as a tool for bargaining. That was my view until March, when the level of urgency spiked, and I abandoned it and took the view that war was the likely outcome. I am obligated, however, to point out my previous view, which would have held this to be the mother of all negotiations. If that is going to happen, it must happen quickly. The U.S., South Korea and Japan all have said they want negotiations. But every sign indicates that North Korea is rushing to acquire a deliverable weapon and deter any country from tampering with it. War would occur before North Korea can reach that point, in my view. But in the back of my mind, I have to be open to the possibility that the ferocious, weak and crazy cripple is alive and well. If so, the North Koreans believe they have a precise understanding of the red line. In the end, I don’t believe they do.
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