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War With North Korea Could Spark New Bear Market

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
September 12, 2017

1. The Argument For Why US Will Not Attack North Korea

2. US Has Large Military Presence in Korean Theater

3. North Korea Tests Hydrogen Bomb – A Game-Changer?

4. Time to Consider Our “Alpha Advantage” Strategy

Overview

The United States is increasingly being provoked toward a war with North Korea by its seemingly insane young leader Kim Jong-un. Not only has Jong-un acquired nuclear bomb capabilities much faster than US intelligence sources had estimated for years, he has also recently developed intercontinental ballistic missiles (ICBMs) capable of reaching US soil.

Jong-un’s repeated testing of nuclear weapons, and more recently ICBMs that can reach our shores – and his threats to deploy those weapons against America – have escalated the likelihood of a US military strike against North Korea in the near future. Yet the mainstream media, and indeed many military intelligence sources, downplay this risk significantly.

The main risk to any US military strike against North Korea is the fact that Seoul, South Korea, a strong US ally – with its population of 10.3 million – could be attacked by Jong-un’s military installments in place on the border within minutes. Millions of South Koreans could be killed very quickly, we are told, if the US initiates a military strike on North Korea.

As a result, the mainstream media and many military intelligence sources assure us it would be very unlikely that the US would mount a preemptive military attack against North Korea. Yet with North Korea’s launch of a long-range missile over Japan earlier this month, the war rhetoric has definitely escalated.

President Trump said that now "all options are on the table" to put an end to the North Korean threat. He tweeted: "The U.S. has been talking to North Korea, and paying extortion money, for 25 years. Talking is not the answer." He may be serious.

Why do I think this is so important for investors to understand? If the US goes to war with North Korea, it could well be the catalyst for the next bear market in the US stock and bond markets. Since the media is telling us such a war will not happen, we need to focus on what will happen if some kind of military action does take place – and what we could do about it in terms of our investments. Let’s get started.

The Argument For Why the US Will Not Attack North Korea

Seoul, the capital of South Korea, sits just 35 miles south of its border with North Korea. It has been well-known for years that North Korea has large conventional military assets in place along its border with South Korea – which could launch a torrent of missiles on Seoul within minutes of any US military attack against North Korea.

South KoreaAs noted above, the population of Seoul is over 10 million. The population of the surrounding metropolitan area of Seoul was 25.5 million – over half of the country’s population – last year. Seoul’s population density is almost twice that of New York City.

So any attack by the US on North Korea could spark a deadly conventional military strike against Seoul, which could result in the quick death of millions of South Koreans.

North Korea is also believed to possess a large arsenal of Scud missiles with a range of 1,000-1,200 kilometers, making a large-scale attack on Japan possible as well.

These are the main reasons the media assures us that a US strike on North Korea is not an option. They also warn that the US does not have sufficient military assets in the region to take on North Korea even if we wanted to, but reports from the Defense Department beg to differ.

US Has Large Military Presence in Korean Theater

The thought is that the US would have to take an extended time to build sufficient forces in the region to mount a large-scale military attack on North Korea. If true, this would give North Korea plenty of time to launch its conventional assault on Seoul and Japan, resulting in the potential deaths of millions of South Koreans and Japanese in short order. But this is not true.

The United States military, across all four service branches, has maintained a massive presence in Southeast Asia, and in particular Japan and South Korea, in the decades that followed World War II.

The US military has almost 40,000 troops that are stationed in Japan alone. That’s by far the largest force stationed overseas among the entire US military. Another apprx. 23,500 US troops are stationed in South Korea.

The US has additional military forces spread out in the islands neighboring Japan, with a heavy concentration on the island of Okinawa. The US Forces Headquarters is located at Yokota Air Base outside western Tokyo and serves as the primary hub. Altogether, the headquarters has about 54,000 military personnel.

In South Korea, four Army, one Navy and three Air Force installations have long served as deterrents to the North in the years following the Korean War. The US also has major military installations in Singapore and Guam.

US Air and Naval Bases

Earlier this year the US Air Force amassed a huge array of helicopters, tactical fighter jets and surveillance aircraft in the region in a show of force aimed to intimidate Kim Jong-un. Also headquartered in Japan is the Seventh Fleet, the largest of the US Navy’s deployed sea forces. The USS Ronald Reagan, a nuclear-powered aircraft supercarrier, is also stationed in the region.

Also in the fleet are up to 14 destroyers and cruisers at any given time, several armed with ballistic missile interceptors. A collection of long-range Tomahawk cruise missiles is also present, which made headlines earlier this year when President Trump fired 59 of them at an airbase in Syria.

As if that wasn’t enough, there are reportedly also 12 nuclear-powered submarines available in the region should war break out.

The island of Guam is largely controlled by US armed forces and the Andersen Air Base hosts a range of bombers, resulting in Guam being dubbed a “permanent aircraft carrier.” Among the aircraft at the base are B-1B bombers, B-52 bombers and F-35B stealth fighters, some of the US Air Force’s most impressive jets.

The US also maintains a military presence in other countries in the region, including Thailand, Singapore and the Philippines.

The point is, the US has plenty of military installations in the region, military aircraft and equipment and support troops available – if a decision were made to attack North Korea, especially if the attack is predominately by air.

North Korea Tests Hydrogen Bomb – A Game-Changer?

Just to be clear, I am not suggesting that we should go to war with North Korea. As noted above, much of the world is convinced that the US would not preemptively attack North Korea and risk the consequences for South Korea and Japan and the future of our alliances with both countries.

Unfortunately, China’s leaders believe the same thing. China is North Korea’s largest trading partner by far and may be the only country with enough leverage over Kim Jong-un to convince him to scale back his nuclear program. Yet as long as China remains convinced the US will not attack North Korea unilaterally, or simultaneously with South Korea, it lacks the motivation to be heavy-handed with Jong-un.

But that may be changing. On Sunday, September 3, North Korea tested what it claimed was a hydrogen bomb detonated underground. The explosion created a magnitude 6.3 earthquake, making it the most powerful weapon Pyongyang has ever tested.

NORSAR, a Norway-based group that monitors nuclear tests, estimated North Korea’s latest test had an explosive yield of 120 kilotons – which means the power of 120,000 tons of TNT. To put that in context, the atomic bomb dropped on Hiroshima in 1945 – which instantly killed 80,000 people – created a yield of just 15 kilotons.

Hours before the test, North Korean state media released pictures of Kim Jong-un inspecting what it claimed was a hydrogen nuclear warhead being placed inside an ICBM missile.

Kim Jong-un

The question is: Is this a game-changer for the Trump administration? If North Korea has indeed developed a hydrogen bomb that is small enough to mount on a ICBM missile that can reach the United States, that is definitely a game-changer!

And if it is, what is likely to be done about it? Most of the military sources I read in the last week don’t believe North Korea’s test of a hydrogen bomb will push President Trump to a decision to launch an attack on Jong-un. Maybe that’s true, maybe not.

There is one option the US has not elected to pursue thus far. The US military reportedly has the ability to shoot down North Korea’s missiles while they are still inflight. There were reports last week suggesting that President Trump recently gave the Defense Department authority to shoot down North Korean missiles that are headed toward the continental US, Hawaii or Guam.

One source also said the president is considering additional authority to shoot down missiles headed toward South Korea or Japan. This is apparently what President Trump was referring to last month when he warned North Korea that continued threats "will be met with fire and fury like the world has never seen."

South Korea recently installed six US anti-missile launch systems on a former golf course south of Seoul. The deployment drew strong objections from China. Such anti-missile systems are also in place in Guam and Japan.

There is, of course, disagreement about how accurate these anti-missile systems are at this point, and whether they can be overpowered by multiple incoming missiles. Maybe we’ll find out the next time North Korea launches another missile over Japan. See more on our anti-missile defense system in Special Articles below.

There is so much more to say on this topic, but I’ll leave it there for today.

Time to Consider Our “Alpha Advantage” Strategy

As I said at the beginning, I believe that if we go to war with North Korea, it will spark a new bear market in stocks. A few years ago, we developed our Alpha Advantage Strategy which combines three successful money managers in a single account, with a minimum investment of only $50,000 (accounts are held at Guggenheim Investments).

Each of the three money managers has a successful, actual track record going back over a decade. But when we put these three managers in a single account, the combined performance was considerably more impressive and with less downside risk. 

Best of all, each of these three strategies can be long or short equities (or move to cash) based on market conditions. Given the increasing global risks, and especially the rising risk of a confrontation with North Korea, having a portion of your portfolio in strategies that can go short (or hedge) if needed could be critical.

If you have ever considered doing business with Halbert Wealth Management, our Alpha Advantage Strategy may be an excellent place to start. The program is having another great year in 2017 following double-digit returns in 2016. Of course, past performance is no guarantee of future results.

You owe it to yourself to take a look and see if this professionally managed multi-strategy investment deserves a place in your portfolio. Do it today in case things get worse with North Korea.

Best end of summer regards,

Gary D. Halbert

SPECIAL ARTICLES

Understanding the North Korea Crisis

Breaking: Chinese Banks Suspend North Korean Transactions

US “THAAD” Anti-Missile Defense System

BLOG: High Corporate Income Tax = Less Pay For Workers

 


Read Gary’s blog and join the conversation at garydhalbert.com.

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