Enzio's Clock

Summary

North Korea (NK) is driving everyone nuts.  We have released one piece outlining our basic view, one that we re-iterated yesterday by wondering what the Muddle East has to do with the antics of Our Beloved Leader. Today we go even shorter-term in four trading ideas for you, given that America is judiciously flexing a miniscule portion of her muscle....

Topics Covered

There are two wars being fought:

• internal succession issues. Who will take over once Our Beloved Leader has gone to the Happy Hunting Grounds? Hard-line loyalists are fighting Kim Jong-Il's family members to see who is the successor. Logically, Kim Jong-Il wants to secure his own dynastic succession, and going nuclear is a way of flexing his muscles. According to the Financial Times (FT) of  26th May 2009, p. 3, "Mr. Kim's family needs the internal kudos of a successful nuclear weapons programme, because the issue of the succession has reached a dangerous point.",  and
• external great game. This is my own "take", the one that I discussed yesterday. Just to re-cap: why are China and Russia not trying to stop NK's threats? Because they are doing a back-room deal with the US on the likes of Iran, Afghanistan or other places in the Muddle East. According to the ever-effervescent Greg Torode, Chief Asia Correspondent for Hong Kong's South China Morning Post (SCMP, 27th May 2009, p. A8), "Of the international powers involved, China and, to a lesser extent, Russia has the best contacts in Pyongyang, reflecting decades-old fraternal ties. But while both powers have put traditional suspicions aside to work with the US, Japan and South Korea under the six-party framework, that doesn't mean they share their best intelligence on the North's intentions. 'If Moscow or Beijing really know what the leadership is up to, they are not telling us,' said one South Korean envoy. 'We're working closer together with both China and Russia than we ever have, but that doesn't mean that the relationships are perfect. When it comes to North Korea, everyone still keeps their cards close to their chests.' "

• attention grabbing. according to David Pilling in said FT, Pyongyang is desperate for direct, i.e. bilateral talks with Washington. So "...some (North Korean) senior officials may have come to the conclusion that the best bargaining chip of all is a certified nuclear bomb capable of being mounted on a warhead. That would certainly grab Mr. Obama's full attention.";
• performance pressure. , the initial underground blast in October, 2006, was not a success. So Pyongyang's scientists were under performance pressure this time around, and perform they did. I'd hate to think what would have happened to them personally  if they had not performed this time around, and
  
• advertising value. NK sells bad stuff to the likes of Syria and Iran, so maybe NK is strutting her stuff in front of such likely customers...?

Given that the U.S. military presence has been building in the face of NK's defiance of global rules of the game, tensions have to escalate. Here is how to earn off this in the very short-term, i.e. over the next few days:

1. Gold will re-assume its safe-haven status. Buy the GLD:US, the world's largest gold ETF;
2. Go long the Swiss Franc, as it, too, is a safe-haven play. Buy the ETF, FXF:US;
3. Go long U.S. defence stocks, and
   
4. Short the Korean stock market and currency.

Just to re-iterate: I do not see this as a long-term war breaking out, and thus do not think that current events in the war theatre will damage Korea's Economic Time® even more than it is already.

• If anything, current NK antics willl reduce Seoul's  "excess supply of goods" to the extent that people in Seoul and environs will be stocking-up food and water, etc., in case of an ill-advised attack by North Korea.
  
• Meanwhile, Seoul's  Central Bank may ease monetarily even more, thereby trying to create an excess supply of money - which would be good for the stock market once feathers and dust have settled yet again...