the fire and fury

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On Tuesday, the world was rattled by President Trump’s improvised comments that if North Korean ruler Kim Jong-un continues to threaten the United States (U.S.), then they will be met with “fire and fury” like the world has never before seen.  Mr. Kim Jong-un and his political party have been menacing the U.S. and its allies for decades, but only now has this been taken as seriously.  Having successfully tested rockets that have improved over time, first ridiculed but now legitimate ICBM missiles capable of scattering terror across much of the advanced world.  The threat now can not be pushed aside.  Foreign governments also conceded this week that Mr. Kim Jong-un can also likely deliver miniaturized nuclear weapons atop these missiles (the smaller payload allows for a lengthier travel distance for his missiles) added to the urgency of this catastrophic risk, and then backed up by Mr. Kim Jong-un’s response to President Trump’s own threats by threatening the U.S. island of Guam within days.  One must obviously wonder to what degree will we be marching towards an unwelcome war, and to what degree have the financial markets even priced in such a calamity.

With political calculus in this arena, there are few hard data points to understand what the outcome from this mischievous tit for tat will be, between President Trump and Mr. Kim Jong-un.  This is partially the gaming between powerful egos uncomfortable with bruising, and neither of whom have fought in battle.  Both are paramount risk-takers.  And so here we are.  Mr. Kim Jong-un is as exceptionally dangerous now to the U.S., as he has been to his neighbors all along.  The citizens of Seoul have endured years of living under such an awesome missile threat, where they would not even be able to run to their nearest shelter door that quickly under attack, let alone safely seal themselves up inside.

In this sort of military situation (since diplomacy hasn’t made things better on an absolute scale that is critical when discussing annihilation risk), there is a perverse first-mover advantage.  Someone or both sides will show the other a lesson before this is done, since neither side seems highly learned at the top of the command.  We have two military chiefs who are stepping over each other with truculent rhetoric, cautiously building out their military to be ready, and creeping towards a conflict that will be costly but not otherwise subsiding.  This is a binary event with impetuous decision makers eager for victory.    

Mr. Kim Jong-un obviously cannot be listened to nor reasoned with.  He needs a tough lesson to be blunted.  Sooner rather than later.  Mr. Kim Jong-un understands that there are limited options to hurt his enemy and needs to pre-emptively launch weapons to effectively kill many of them.  It is foolish to think he is simply happy completing an arms race, and then peacefully ruling over his people like Buddha. 

Miscommunications, misconceptions, mischaracterizations, miscalculations, misfirings... misgivings.  

This is how military strafes begin, and heighten.  Which then begs the question as to why are the U.S. markets have only fallen 1.5% (more benign than the rest of the world).  Investors are too naïve to think the unthinkable will occur, though it happens to them all the time.  But we have a martial situation, which will result in the loss of life, and this warrants the dramatic uncertainty risk far greater than 1.5%.  Americans will be in awe, for a threat they are not accustomed to seeing.  U.S. and global markets will continue to adjust pricing downward to reflect this. 

And combined with over-valued and low-volatility market streaks that started this week, and we officially see the end of the Trump market bump.  Economic weakening would be compounded by these tensions added to an October debt-ceiling showdown.  On the other hand, financial risks are sub-additive (investors price the add-on risk as less than if they valued the risk separately, as a stand-alone). 

In other words, if we were expecting a 5% or so correction anyway during the autumn (note the 2.5% single-day market crash for no reason at all last September, coming off of a familiar sounding dull and complacent summer), and Korean war risk is also a premium of equal magnitude, then we should expect a near-term continued smash in most global equity markets of at least several more percent.  This is not about patriotism.  It never is.  We have to be cautious in how we evaluate and allocate risk; and that’s all this article is about.

Side note:
Here are seven sample social media posts (some of which have been cited in print news as well) as a timeline reminder that we have been consistently warning investors to be cautious, particularly more so during these record-setting final weeks' “run-up”.  And instead position for more of a larger fall-out in the markets sometime this year.  Click on any to enlarge.