Wars and Rumors of Wars: Fire and Fury Signifying Nothing?

by David Haggith, The Great Recession Blog:

August is a sultry month for stocks as markets thin out during the dog days of summer. Everyone leaves investing for a break from the heat. Statistically, August is the worst month for overall stock performance, while September delivers more of whatever August sends its way or brings its own dark surprises. After that, October loves a surprise and is the worst for having the most major crashes.

As markets now slide into their toughest time of the year, they also also face a major war of words that may quickly become more than words. The days of market calm appear now to have ended. $500 billion worth of supposed US market “value” just cascaded into oblivion last week. (Over a trillion worldwide. Of course, it could reappear tomorrow.)

Markets crawling under the clouds of war

One place where August is living up to its reputation is in volatility. August is usually the most volatile month of the year.

The US stock market’s volatility index (VIX) became eerily placid for many weeks this summer, but this past week the VIX rose 70%. Of course 70% from a position so small and calm is not a lot, but it’s an awakening. And there appear to be many people and institutions now awakening.

PIMCO began loading up on puts to hedge against a market plunge while building up a strong cash position, suspecting the highly unusual calm is the kind that comes before a big storm. PIMCO’s chief investment officer said that Pimco “has been taking profits [a nice way to say selling off its stock holdings] in high-valued corporate credits and built cash balances for when better opportunities arise.” That’s also a cautious way of saying,

“We’re getting liquidity higher,” Ivascyn told Reuters in a phone interview. “If we see actual military altercation, markets can go a lot lower. And at the same time, volatility has been so low for so long that it doesn’t take much for markets to get worked up.”

The PIMCO CIO said that although the market has yet to panic, “you will certainly see panic if all of this turns into a sustained military encounter.” (Zero Hedge)

So, not everyone in high places sees the market’s languor as good. Now, under the clouds of war with North Korea, the calm is giving way.

Trade war with China on horizon

Not all wars that can damage an economy or a stock market involve weapons of mass destruction. While Trump and Kim Jong-Un are going nuclear with their rhetoric as well as their actual war footing (“Military solutions are now firmly in place … our nuclear arsenal … now far stronger and more powerful than ever before,” Trump tweeted), Trump has also declared trade war on China, saying such a war will be launched in a week.

As if there weren’t enough geopolitical and social stress points in the world to fill a lifetime of “sleepy, vacationy” Augusts, late on Friday night President Trump spoke to Chinese President Xi Jinping and told him that he’s preparing to order an investigation into Chinese trade practices next week, according to NBC. Politico confirms that Trump is ready to launch a new trade crackdown on China next week…. It is also an escalation which most analysts agree will launch a trade war between Washington and Beijing…. Should Trump follow through, the move will lay the groundwork for Trump to impose tariffs against Chinese imports, which will mark a significant escalation in his efforts to reshape the trade relationship between the world’s two largest economies. In other words, even if there is now conventional war announced with either North Korea or Venezuela, Trump’s next step is to launch a trade war against China. (Zero Hedge)

The near inevitability of both wars

Both wars may be next to inevitable and were certainly not unforeseeable (black swans) when I said the economy would crash this summer. They are those dark clouds among a whole horizon of storm clouds that I’ve been pointing out — the clouds that I’ve been saying have been growing closer to us and would be here by summer, making a summer economic storm almost inevitable, too.

The US government under Obama refused to take military actions against North Korea while it was becoming a nuclear power, so now North Korea is a nuclear power. Surprise! Not really. Who couldn’t see this coming for more than a decade? The now global known reality forces the US to a worse conundrum — wage a war with an unstable nuclear nation run by a lunatic or let an unstable nuclear power with an insane leader achieve a great deal more nuclear capability. (Some might wonder which nation I’m speaking of.) That’s what inaction on tough problems for too long brings you — worse problems. The US kicked the can down the road when there was no real threat of nuclear retaliation; now there is a clear and credible threat of nuclear retaliation.

The same is true with Chinese trade. The US government under Obama turned a blind eye to Chinese trade practices that fly in the face of truly “fair trade,” again kicking the can down the road for years, rather than confronting the problem head on. So, now the US faces the risk of starting a trade war at a time when it may be starting a military war and at a time when it needs China to remain neutral with respect to North Korea if there is a war or to be an ally in getting North Korea to change (an unlikely prospect). Congress and Obama kicked the can down the road with respect to needed economic reforms, Korean nuclear armament, and unfair Chinese trade practices, always preferring to “talk about it,” and each problem has only become far harder to solve.

That, of course, is what I claimed would happen when I started writing The Great Recession Blog: all of the government’s weak-kneed, temporary solutions would push the nation’s economic problems ahead, making them much harder to face in the future. That future is here.

President Trump, Secretary of State Tillerson and Defense Secretary Mattis have all made it clear that a nuclear-armed North Korea with ICBMs that can hit the United States will not be allowed.

If North Korea persists, this means war with the U.S. There’s only one problem: North Korea thinks we’re bluffing.

North Korea believes that the U.S. is bluffing based in part on the prior failures of the U.S. to back up “red line” declarations in Syria over its alleged use of chemical weapons. Their belief is also based on the horrendous damage that would be inflicted on South Korea.

China also believes the U.S. is bluffing. (–Jim Rickards in The Daily Reckoning)