By now you’ve probably heard Donald Trump’s stern ultimatum for North Korea to back off or face utter destruction. Trump said they will “face fire and fury like the world has never seen.” Judging by history, you’d be wise to listen to these words because once the US involves itself, it usually turns out bad. Instead North Korea retaliated by threatening a missile strike on a US Pacific territory, Guam, which is frighteningly close to Australia. Are they mad? Unfortunately US Intelligence have assessed the situation and is pretty certain North Korea has produced a miniaturised nuclear warhead. The reason for its production of a nuclear war head is to prevent the US from overthrowing its Kim Jong Un regime in similar fashion to Saddam in Iraq and Gaddafi in Libya. The Doomsday clock sits on two and a half minutes to midnight, right on the brink of nuclear disaster. It’s getting a little scary. With the realisation that there could be a real missile strike on Guam or anywhere for that matter, the pressure is now on the US to nip this in the bud before it becomes real.
So what next and how will markets react?
If reports are true and North Korea has found a way of packing a nuclear warhead into a ballistic missile, it takes this entire war game to another level. Guam is a US strategic military installation and any strike will target the Anderson Air Force Base. In a statement by North Korea’s KCNA news agency the strike would be “put into practice in a multi-current and consecutive way any moment once Kim Jong Un, supreme commander of the nuclear force of the DPRK makes a decision.” The statement comes two days after the UN Security Council placed new sanctions on North Korea such as the banning of coal. Even though North Korea may have successfully produced a nuclear warhead, there are reports that the warhead’s re-entry vehicle hasn’t been perfected. That means, when the warhead comes back into the Earth’s atmosphere it burns up. That gives allied forces a little bit of hope.
Countries nearby North Korea have been placed on high alert. Japanese cities are preparing for any threat and are holding evacuation drills in the event of a possible missile attack. The media is reporting a record number of Japanese jets are scrambling and are ready for attack. What the recent North Korean missile test does mean though, is that Australia is within striking distance. Whilst the threat on Australian soil is rather low, there is still the possibility of a strike and we don’t have a missile defence system. South Korea and Japan both have anti-missile defences that can prevent any missiles from getting through. But rest assured, in the event that North Korea launches, the US is more than well prepared. Both the US and South Korea have pre-emptive strike plans. South Korea has a three-stage defence system. The first is a pre-emptive strike where all off North Korea’s offensive capabilities are eliminated by detecting signs of an impending nuclear missile launch and striking nuclear weapons sites and missile bases. It’s called OPLAN 5015. Allied forces will attempt to eliminate North Korea’s missiles before or at launch. The major concern is the bombardment of the South Korean capital of Seoul, with initial casualties projected in the thousands. In any event, it will trigger OPLAN 5027 which is the US and Combined Forces Command basic warplan. It will involve Australia too. Under this plan the US will basically use everything in its firepower to obliterate North Korea. Not the prettiest outcome. Pyongyang has the ability to start a Korean War, but not the ability to survive one.
As you can easily predict, global markets will be rattled in the lead up to an all-out war between the US and North Korea. There will be a significant fall in the value of shares across the board. The Chinese economy will also destabilise with a flood of refugees moving into China for safety. We all know that stock markets hate uncertainty and one would easily conclude that during times of war market tumbles. But this isn’t always the case. Strangely enough, the US market tends to rally the moment the country begins military operations abroad. Prior to the first bullet being fired, markets usually tank prior to the breakout of war. This is due to the uncertainty that markets hate. Once war breaks out, financial markets shrug off the impact and markets recover. The above chart we took from seekingalpha.com. The shaded areas are when war was in effect. You can see during each of the shaded areas, the market went sideways. What is surprising after each shaded when war was over, there was a massive multi-year bull market. So if history is anything to go by, markets fall prior to war, trade sideways-up during war and rally once war is over. Gold usually rises during the conflict as investors move to safe haven assets. Now there is no blueprint on how the markets behave during war, especially a nuclear war. So when making investment decisions during times of war, anything can happen. It’s a scary time where somethings are simply outside your control. Regardless of what happens just remember to keep a cool head and make rational decisions and pray that war doesn’t break out. There are no winners in wars; only losers.