Thursday, April 13, 2017

N. Korea: “Beware the ‘Day of the Sun’”

“Beware the ‘Day of the Sun’”
by Brian Maher

The “Day of the Sun” dawns this Saturday over the Korean Peninsula. But it might not break as peacefully as the term suggests. April 15 - this Saturday - North Korea celebrates its most significant national holiday. That would be the birthday of its founding leader, Kim Il Sung. Old Kim, grandfather of current leader Kim Jong Un, went to the boneyard in 1994. But they still celebrate his natal day. They call it the “Day of the Sun.” And some analysts think North Korea’s planning to celebrate the late Kim’s 105th birthday with a bang - literally. And quite a bang at that.

Relying on the testimony of the U.S. government and “other sources,” Voice of America’s Steve Herman reports today that North Korea has "apparently placed a nuclear device in a tunnel, and it could be detonated Saturday a.m. Korea time." According to 38 North, a website dedicated to analysis of North Korea, satellite imagery reveals elevated activity around the likely test site: "Commercial satellite imagery of North Korea’s Punggye-ri Nuclear Test Site from April 12 shows continued activity around the north portal, new activity in the main administrative area and a few personnel around the site’s command center." They say the site appears "primed and ready." It would be North Korea's sixth nuclear test in 11 years. It conducted two last year alone.

And Trump’s threatened unilateral military action to end the North Korean nuclear “menace” - coming within an inch of actually saying it. And he’s rerouted a “very powerful armada” to Korean waters, led by the carrier USS Carl Vinson. After all, diplomacy without arms is like music without instruments, as Frederick the Great supposedly said.

But Trump’s not the only one cocking his fist at North Korea. So is North Korea’s biggest “friend” - China. According to China's state-run TV, Chinese President Xi Jinping said, “China insists on realizing the denuclearization of the peninsula, insists on maintaining peace and stability on the peninsula and advocates resolving the problem through peaceful means.”

In case North Korea didn’t quite get it: In the state-run Global Times, China warns, "If the North makes another provocative move this month, the Chinese society will be willing to adopt severe restrictive measures that have never been seen before."

Still not getting it, Mr. Kim?: China has a bottom line that it will protect at all costs. That is, the security and stability of northeast China. If the bottom line is touched, China will employ all means available, including the military means to strike back. The Chinese People’s Liberation Army (PLA) will launch attacks to DPRK (North Korean) nuclear facilities on its own.

Well now. To put an even finer point on it, China’s reportedly dispatched 150,000 troops to its border with North Korea. Why’s China so touchy about the North’s nukes? Mainly because China fears that another Korean war would result in the North’s collapse.

China considers North Korea a buffer state. It stands between China proper and South Korea - a key democratic ally of the United States. A reunified Korea under South Korean leadership would plant a key American client smack on its northeast border. And China warns that it won’t allow “a government that is hostile against China on the other side of the Yalu River." Jim Rickards says “That’s China’s worst nightmare.” Plus, millions of desperate North Koreans would likely cross the border into China, potentially destabilizing the Middle Kingdom. And Chinese leadership values order and stability above all else.

So… with China so terrified of North Korea’s nuclear program, we therefore suggest President Trump adopt a new strategy on North Korea: “Let’s you and him fight.” Leave the wet work to China. Let them attack the North’s nuclear facilities. It wouldn’t provoke a possible North Korean invasion of the South. And thousands of American lives could be saved.

Talk about playing chess! Trump would be the grandmaster of grandmasters if he could somehow maneuver China into being his cat’s paw. Realistic? Maybe. Maybe not. And maybe the intelligence is wrong and North Korea really isn’t planning a nuclear test this Saturday. Or maybe China can jaw-jaw the North into canceling it. But if North Korea does actually test another nuclear device this Saturday, we’ll be keeping one eye on Trump... and the other on China...

Below, Jim Rickards shows you on a deep dive of the North Korean nuclear problem. And what’s one more reason why Trump has leverage over China? Read on.”

"China Holds Key to North Korea Resolution"
By Jim Rickards

"North Korea has for centuries been a hermetically sealed society. In fact, it is known informally as “The Hermit Kingdom.” Reliable information about the leadership of Kim Jong Un is hard to come by. U.S. and Japanese technical means can track the launch of ballistic missiles and nuclear bomb tests, but these capabilities have to be combined with intelligence about intentions to properly assess the threat.

A highly placed North Korea defector has recently released frightening new information about those intentions. The defector, Thae Yong Ho, says categorically that Kim Jong Un is “desperate in maintaining his rule,” and “he would use his nuclear weapons with ICBM.” The ICBM is an intercontinental ballistic missile capable of hitting Los Angeles. If armed with a nuclear warhead, it could kill millions of Americans in minutes. North Korea could be just a couple of years away from being able to launch such an attack against the U.S.

The U.S. and North Korea seem to be on a collision course. The Trump administration has made it clear that this combination of capabilities and intentions will not be tolerated and the U.S. is prepared to use force to destroy those capabilities. Then the next question is how are they going to stop it?

The Trump administration was hoping that it could steer the North Koreans toward acceptable behavior through the use of financial sanctions. The U.S. pursued this policy with some success during both the Clinton and Bush 43 administrations, but both presidents backed off from sanctions in exchange for vague promises from North Korea that were never honored in full. The Obama administration did almost nothing to deter North Korea and essentially ignored the issue for eight years in order to appease China. Now the Trump administration is playing the sanctions card again.

North Korean banks have been banned from the global payments system called SWIFT. This is a powerful move, but North Korea can work around it. It can use Chinese banks to make international payments on its behalf without disclosing the name of the real beneficiary to SWIFT. The solution to this is for the U.S. to impose sanctions on Chinese banks doing business in the U.S. that facilitate North Korean payments. That’s an effective form of sanction, but it risks escalating tensions with China. And Trump is trying to coax China into cooperating on North Korea’s nuclear program, which I’ll explain further in a moment.

Another way to stop North Korea’s nuclear program is to bomb their nuclear enrichment sites, their stores of fissile material, and their manufacturing sites. These sites are known through intelligence. But the problem is most of these sites are buried deep under mountains, which are impervious to conventional bombing. The use of nuclear weapons is a possibility, but that would obviously open up another set of questions entirely.

Having said that, there’s an old saying - “If you shoot at the king, don’t miss” - meaning if you’re going to attack an adversary, make sure you finish the job. Don’t leave him in a position where he can come back and attack you. So the U.S. can’t afford any half measures when it comes to North Korea, and that being the case, the use of lower-yield tactical nuclear weapons to attack deeply buried positions cannot be ruled out.

I should mention here that today the U.S. dropped a MOAB ("Mother of All Bombs") on a cave complex in Afghanistan. The MOAB is a fuel-air explosive that uses oxygen from the surrounding air to create a massive explosion. It’s the most powerful bomb we have ever used without " going nuclear." And clearly it was used as "target practice" for use in North Korea.

Of course, any major attack on the scale required to knock out North Korea’s nuclear program risks all-out war, which could result in a protracted campaign of heavy fighting. About 10 years ago, a Pentagon study suggested another Korean War would result in 250,000 American casualties and a million Korean deaths.

Needless to say, Trump would like to avoid that outcome. And what’s the one country that has influence over North Korea? China. North Korea is a client state of China. China provides North Korea with large amounts of food aid and imports 90% of North Korea’s exports, primarily coal. Only China can exert the type of pressure on North Korea the U.S. needs.

And China doesn’t want a war in Korea either. It would likely lead to the defeat of its buffer state and the reunification of North and South Korea under Seoul’s leadership. That means China would share a border with a strong, close democratic ally of the U.S. That’s China’s worst nightmare.

So last week, Trump tried to enlist President Xi of China is his efforts to dissuade North Korea from continuing down the path to war. The first thing Trump probably said was “Before we talk about trade or currency what can you do for me about North Korea?” The implicit message in that question is “Hey China, if you can help with North Korea maybe we’ll go easy on the currency thing and maybe we’ll go a little bit easier on the tariffs. But we need your help on North Korea because the alternative is war, and neither of us want that.”

This is the art of the deal, this is how Trump operates. And have you heard Trump call China a currency manipulator recently? No, that talk has died down. Just yesterday in fact, Trump told The Wall Street Journal, “They’re not currency manipulators.” That’s a major reversal from his campaign talk. And Trump admitted one reason he changed his mind was precisely because the accusation could derail negotiations over North Korea.

That may seem like Trump is caving, but Trump actually is in a rather strong bargaining position. The Chinese economy is in trouble right now, with a massive overhang of debt and large amounts of capital flight out of the country. China doesn’t want to rock the boat even more with a trade war against the U.S.

As my partner Kevin Massengill explained recently, China is much more fragile than most people think. And the continued legitimacy of the Communist Party depends on maintaining a strong economy with high growth and low levels of unemployment. Avoiding a trade war with the U.S. is therefore a powerful incentive for China to cooperate with Trump on North Korea.

Another source of Trump’s bargaining power has to do with internal Chinese politics, and it’s not something you’ll hear about in the mainstream press. Trump’s not up for election, but the Chinese president, Xi Jinping, is in a way. Now, China’s technically a communist country, so it’s not like they have free, democratic elections. But they do have Communist Party summits. There’s one coming up in October, so there is a leadership change cycle occurring in China. The Chinese president gets a five year term and is then eligible for a second five year term. Xi took power in 2013, so he wants to get re-appointed for a second term.

Xi doesn’t want to make waves or be responsible for a debilitating trade war with America. Basically, Xi doesn’t want any problems that would undermine his leadership or his position within the party hierarchy. He certainly doesn’t want a war that would ruin China’s client state and put a key U.S. ally on its border. And cooperating with Trump to pressure North Korea to cease its nuclear program is probably Xi’s best option. So this is another reason why Trump may have a willing dance partner in Xi.

At the end of the day, either North Korea will desist, likely under Chinese pressure, or the U.S. will attack pre-emptively. But North Korea is hard to predict and markets are far too complacent about the prospects of war. War could actually be closer than investors realize. If the shooting starts, by then, it’ll be too late to adjust your portfolio. The time to move to gold, silver, cash and other hard assets and out of vulnerable equities is now - before the shooting starts."

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