North Korean crisis? Not so much

August 9, 2017 10:22 AM

Crazy like a fox
Yet within the scope of what drives the supposedly irrational activity of Kim Jung-un as he repeatedly challenges the West and especially the US is the key question: So is this guy truly crazy? Or just ‘crazy like a fox’?

Having now achieved two of the components necessary to present a real threat (ICBMs and miniaturized nuclear weapons) where does he go next. The answer is fourfold. The first step is to hone the re-entry survival (given all of the heat generated in dropping back to earth) for his alleged miniaturized nuclear warheads. The second is to extend the range of North Korea’s ICBMs. And the next is to refine the triggering mechanism for the nuclear warheads, with the final step being accurate targeting for the entire enterprise.

The first two are fairly readily achieved with some study of the successful Western missile programs and future testing. The latter two are more challenging, yet with the triggering being more critical than the targeting. How much difference does it make if a NOKO nuke explodes over San Francisco instead of the targeted Los Angeles?

MAD becomes IAD?
Yet all of this may still be silly in the context of the reality of likely outcomes from any NOKO nuclear attack on the United States. And within his allegedly irrationality, Kim Jung-un likely fully understands this. What was MAD during the long term U.S.-Russia Cold War confrontation is now likely IAD: ‘Individual Assured Destruction’.

The current NOKO threat is for an already ostensibly possible nuclear strike on the U.S. Territory of Guam. That would be horrible, and the potential for a nuclear strike on Alaska and especially the continental U.S. is an almost unimaginable horror. That would be on both a humanitarian and commercial level.

Imagine if that wayward nuke actually did hit San Francisco instead of Los Angeles. However, there is no chance that Mr. Kim could knock out any meaningful percentage of the US nuclear arsenal. And in that regard he and his generals must surely know that any attack on the U.S. (or any of its allies) would bring a massive retaliatory response from the United States. In effect the exact result that North Korea and its benefactor China want to avoid at all costs.

After any singular or more broad based NOKO attack the North Korean state would cease to exist. As such, it seems that Mr. Kim’s bombast and accelerated development of the nuclear weapons program is more so for domestic consumption to solidify his position as undisputed leader than any real attempt to get into a nuclear war with the United States. That he would now voluntarily give up his nuclear weapons is unfortunately also unlikely for that same domestic reason. The only example of this is Muammar Gadddafi in Libya, who was subsequently overthrown and killed by his people.

So IAD is likely new way of the world when it comes to the NOKO nuclear arms program and the acquiescence of the West to the idea of putting up with Kim Jong-un’s ravings about the belligerence of the West and suppression of his people. Sad but true, and not necessarily anything the markets are going to be concerned about for long unless Mr. Kim pursues obviously more belligerent behavior.

The question now is how long the weakness of the equities, residual bid in the govvies and interesting lack of any additional strong bid in the US dollar will last prior to the next ‘fig leaf’ of a U.S.-China-NOKO diplomatic agreement (and possibly the re-opening of the previously useless ‘six party talks’.) The classically bombastic Trump statement on NOKO being hit with “…fire and fury like the world has ever seen…” is as usual neither realistic nor helpful, and Secretary of State Tillerson is already playing it down this morning.     

More likely the West will grudgingly accept the existence of a nuclear North Korea, just as it has with regional powers like Pakistan. The alternative of a U.S. military strike would be too disruptive for the relationship with China and way too costly for U.S. allies in the region, especially the very vulnerable South Koreans who just elected a more pacifist new leader.

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About the Author

Alan Rohrbach is Lead Analyst and President of Rohr International, Inc.  He is an international equity index, interest rate and foreign exchange trend advisor. His forte is ‘macro-technical’ analysis of how fundamental influences blend with technical aspects to drive trend psychology. Clients include international banks, hedge funds, other portfolio managers and individual traders.