While the Dow Jones Industrial Average, S&P 500 Index and Nasdaq Composite index hit all-time highs (again) last week and with volatility hovering near a 24-year low, Secretary of Defense James Mattis gave an underreported speech that should cause investors to rethink their complacency.
In an address to a security conference in Singapore, the retired Marine Corps general who headed Central Command from 2010 to 2013 called North Korea’s burgeoning nuclear program a
“clear and present danger” and an
“urgent military threat.”
By my reading, that ratchets up the already sharp war of words between the Trump administration and North Korea’s ruler, Kim Jong-un. Secretary of State Rex Tillerson had said failure to control North Korea’s accelerated testing of missiles and nuclear weapons could have
“catastrophic consequences.” In April, Lt. Gen. H.R. McMaster, the president’s national security adviser, said the problem of North Korea’s nuclear arsenal is “coming to a head” and that it poses a
“grave threat” to the U.S. and its allies.
All three officials stressed that diplomacy, particularly with North Korea’s chief ally, China, was the best way to deal with the problem. But earlier this year, Tillerson declared that the policy of
“strategic patience” was over and that “all options are on the table.”
North Korea’s ‘gift package’
Kim Jong-un’s rhetoric has become more overheated than our own president’s Twitter account. Last month, North Korea warned that U.S. “provocation” (presumably our joint military exercises with ally South Korea) would mean
“a total war which will lead to the final doom of the U.S.” He has threatened the U.S. with a
“super-mighty preemptive strike” and vowed to
“send a bigger ‘gift package’ ” to the U.S. (The 33-year-old baby-faced tyrant sure has a way with words, doesn’t he?)
Meanwhile, in nearly six years as ruler, Kim Jong-un has tested 78 missiles; his father Kim Jong-il tested only 17 in a 16-year reign. And they’ve improved markedly: Recent tests of solid-fuel missiles, which
“would give the United States little warning of an attack … were clearly successful,” The New York Times reported, while the U.S.’s own $330 billion system to intercept incoming missiles has had a failure rate above 50%.
North Korea is believed to have enough radioactive material for up to 25 nuclear weapons now, but
“by 2020, [it]could have a nuclear stockpile of 100 warheads that can be mounted on long-range ballistic missiles capable of reaching the United States,” Robert S. Litwak of the Woodrow Wilson International Center for Scholars wrote in USA Today.
“North Korea is essentially a failed state on the verge of a nuclear breakout.”
Kim Jong-un, several analysts write, is determined to avoid the fate of Libya’s Moammar Gadhafi, who gave up his effort to acquire nukes only to be deposed and killed in “regime change” after the Arab Spring.
Possibility of preemptive strike
So, without massive diplomatic and economic pressure on North Korea by China, a U.S. preemptive strike becomes ever more likely. George Friedman, founder and chairman of Geopolitical Futures, recently warned that the U.S.’s big military buildup off the Korean peninsula — including two aircraft carriers and daily exercises by more than 100 F-16 aircraft (which also preceded Operation Desert Storm in 1991) — means a U.S. attack on North Korea is imminent.
If it happened, almost everyone agrees the consequences would be disastrous. In the first Korean War (which technically never ended), 2.7 million Koreans, 800,000 Chinese and 33,000 Americans died. Now, North Korea has a million-man army and is hiding weapons, troops and material in a massive network of bunkers, shelters and tunnels that would likely allow it to survive U.S. airstrikes with enough firepower to retaliate heavily against Seoul, the world’s fifth-largest metro area with a population of 24 million. It also has nuclear and chemical weapons and medium-range missiles that could reach Seoul, Tokyo, or even U.S. bases in Guam.
In 1994, General Gary Luck told President Bill Clinton a second Korean war could result in a million dead and $1 trillion in economic damage. Today, Northeast Asia is a critical hub of global commerce: Together, Japan and South Korea’s GDP is over $6 trillion, and of course China borders North Korea.
From crisis to chaos
It’s hard to tell how many of Kim’s (and our) threats are saber rattling and how much are real. Historically, geopolitical crises have had no lasting effects on markets, but crises can spin out of control, especially with the paranoid Kim facing a flailing President Donald Trump desperate to change the subject from James Comey and the Russia investigations.
The recent rhetorical battle may not lead to armed conflict, but war on the Korean peninsula would be massively unpredictable, and investors are woefully unprepared for the potentially cataclysmic consequences. If that isn’t a black swan, I don’t know what is.