Korea, China and stock markets
Following last week's review on the impact of Korea on markets, I had a number of calls asking for further information regarding the instability it would cause.
It is indeed a highly complicated situation, and as always, very little of the real information makes its way to the top.
Whilst news channels will make the most of it, and the reality TV star turned ‘president' will tweet like his thumbs are remote controlled, markets will not be interested unless something is likely to escalate within the next six months.
Many times I have heard ‘markets do not like uncertainty', the sort of rhetoric that is helpful only in knitting spaghetti, the truth is we could not have a more uncertain time financially or geo politically than we have now, yet markets haven't nosedived. By all accounts they are currently overvalued, and this would easily have been the opportunity to rebalance the books.
On the bright side, it would appear Russia and China have calmed nerves and Kim Jong's expression of his intent not to escalate, create the opportunity for Trump to back down from his “Hopefully we will never have to use this power…but there will never be a time that we are not the most powerful nation in the world!”
Really! At my school that comment would have been worth detention.
Today will be the day however. The ‘freeze for freeze' that China and Russia have proposed will not be met well by North Korea when we wake up today, if the US and South Korea commence their ‘Ulchi-Freedom Guardian', a basic display in South Korea of 17,500 US personnel strength based in South Korea. That will be a test of US intention and will undoubtedly spark a strong reaction with North Korea and the test rockets over Guam may well be back on again.
The Ulchi- Freedom Guardian' is said to be designed to “improve the alliance's ability to defend the Republic of Korea”. Chinese officials have made it clear that dialogue is all that is necessary right now and China are very much the key pin.
It seems strange to be thinking about the value of investments with this going on but it's the question that was asked. We'll come to China in a moment but first consider the impact of a war in the area and consider that the UK has said it will stand shoulder to shoulder with Trump…really?
As mentioned last week the South Korean economy would be hammered, and it accounts for 2 per cent of the world economy. The war on Syria has cost them 60 per cent of its economy (GDP). The last Korean War cost South Korea 80 per cent of its economy (and 1.2 million lives).
This will be a US led war on foreign land so consider that in 1952 the US government was spending 4.2 per cent of its own economy fighting that war and the Iraq War cost the US (actually its tax payer) 5 per cent of a year's economy.
US federal debt, which is already unhealthy, would be driven higher still. No one wants that. A weak US economy in a hustle with China is no good for anyone and would undoubtedly see a sharp retraction in markets and the excuse the market makers would want to make money on its downturn.
The devil is in the detail of negotiations (not with North Korea but with China) as mentioned last week.
Dandong (just over the border from North Korea) is home to numerous Chinese companies the US sees as a threat. It's the source of the machinery (purchased in contravention of US and UN sanctions) and offshore financing from Chinese banks that North Korea needs for financing. The US had asked China to go after the ten key Chinese companies but that hasn't happened.
The upcoming communist party congress freezes the ability for the current president to be too hefty and undoubtedly that will be the time the bigger decisions will happen.
China is clear it doesn't want to hurt North Korea's economy too much – a united US led Korea next door isn't good news. There is a clear stand off. The US knows it was outplayed in the recent negotiations and that China could have dealt with the so-called ten rogue companies.
So watch out today and also for the fallout of the autumn congress.
Peter McGahan is the owner of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have a question on any financial matter, or would like your investments reassessed, call Darren McKeever on 028 6863 2692, email email@example.com or visit us on www.wwfp.net