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Peace in the Korean Peninsula Could Trigger a Stock Market Crash Lombardi Letter 2018-06-14 11:08:51 kim trump summit defense sector defense stocks north korea korean peninsula kim jong-un us economy trump The stock market has processed the U.S.-North Korean summit between President Donald Trump and Supreme Leader Kim Jong-un in Singapore with a nod of approval. But peace could have triggered a stock market crash led by the defense sector. It turns out that defense stocks remain safe. Analysis and Predictions 2018,News,Stock Market Crash,U.S. Economy,U.S. Politics,World Politics https://www.lombardiletter.com/wp-content/uploads/2018/06/iStock-958708240-150x150.jpg

Peace in the Korean Peninsula Could Trigger a Stock Market Crash

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Peace in the Korean Peninsula

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Will Trump-Kim Summit Trigger a Defense Sector Stock Market Crash?

Had Trump delivered what the mainstream pundits and politicians expected from Kim Jong-Un, investors worldwide would have reacted bearishly, producing a stock market crash.

The mainstream media expected—or was hoping for—a diplomatic disaster in Singapore.

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Yet, in the longer term, the U.S. economy has more to gain from the threat of war than from peace.

For now, the Dow Jones Industrial Average (DJIA) has made another foray above the 25,000-point mark. The stock market has processed the U.S.-North Korean summit between President Donald Trump and Supreme Leader Kim Jong-un in Singapore with a nod of approval.

Most investors clearly appreciate the value of what it has produced. Only the die-hard pacifists, if any are even left, expected an immediate denuclearization of the Korean Peninsula.

Even fewer expected President Trump to make as bold a concession as to order the demilitarization of South Korea.

The Status Quo Remains

Not a single U.S. military post will be dismantled in South Korea. And the two most significant tangible results of the summit, based on the final document (apart from denuclearization), were:

  1. The U.S. and North Korea establishing diplomatic ties.
  2. North Korea would allow the return of American prisoners of war and soldiers declared missing in action in the Korean War.

The Democrats in Congress set a higher bar, of course. They demanded the impossible; nothing short of North Korea giving up its entire arsenal of weapons (conventional, biological, chemical, and nuclear).

In other words, for them, a successful Trump-Kim summit involved a total capitulation of North Korea. And anyone with a rational mind would have understood that to be impossible.

Oddly enough, had Trump brought home the result the Democrats demanded, it certainly could have triggered a stock market crash.

Long-Term Prospects for Defense Stocks Remain Bullish in the Long Term

The kind of summit the Democrats “required” would have meant a collapse of the defense stocks.

Since Trump moved into the White House, every time he and Kim Jong-un spiced up their rhetoric against one another with threats like school children at recess, defense stocks went higher.

Conversely, any mention of peace sent defense stocks tumbling. And at no time was that clearer than when musings of a Trump-Kim meeting started in the latter half of March 2018.

The defense sector took such a hit that it triggered a mini stock market crash as the DJIA chart below shows.

Chart courtesy of StockCharts.com

Meanwhile, if the Trump-Kim meeting has no doubt and justifiably raised hopes of peace, then defense sector investors need not despair.

There is a greater chance of a stock market crash in the second half of 2018.

The Korea summit has not lifted any of the main risks hanging over the financial markets—or, for that matter, the world at large.

Very little has changed in U.S.-North Korean relations. Even if peace had broken out, the defense sector stocks might have dropped, but it would have been a temporary glitch.

Indeed, beyond the handshakes, jokes, and personal chemistry that transpired between Trump and Kim in Singapore, commentators failed to grasp the main subtext of the summit.

No Nukes, No Deal

In true Trump style, it’s the showmanship that counts. Trump scored a significant domestic victory against his detractors. The CNNs and CNBCs of the world were forced to concede that Trump went where no other president since the Korean War had dared.

Yet, nothing has changed in military power terms. The Japanese and Chinese can sleep a few more tranquil nights. North and South Korea remain divided.

There are no plans to unite North and South Korea, allowing for the emergence of an economic superpower capable of overpowering Japan in gross domestic product (GDP) per capita—and even China in overall GDP.

Likewise, North Korea remains a sufficient “threat” to the region that demand for weapon installations and jet fighters will not fade.

Politicians on both sides of the Pacific Ocean will still be able to justify procurement contracts with the Lockheed Martins and Northrop Grummans of this world.

If anything, the successful summit and its extroverted if inflated message of peace has generated many benefits for the civilian component of aerospace and defense stocks.

The prospect of diplomacy in the Korean peninsula will encourage more travel to the region. Demand for airliners and aircraft engines will likely increase.

Thus, companies like Boeing Co (NYSE:BA), Airbus SE (ETR:AIR), General Electric Company (NYSE:GE), and United Technologies Corporation (NYSE:UTX) should gain in the medium and longer terms. The minor stock market crash affecting the defense sector is temporary.

The Status Quo Has Prevailed

Indeed, North Korea’s Supreme Leader has not conceded on any more points that he had not already committed in the past.

The only real change is over language. During the historic summit in Singapore, Donald Trump and Kim Jong-un managed to use civil language and friendly tones from start to finish.

Everyone left the meeting satisfied.

Even the defense contractors have a reason to smile. The main purpose and achievement of the summit is that it happened in the first place. They came, they met, and they left. And all that without a single punch being thrown.

The status quo prevails in the Korean Peninsula. Sanctions and U.S. soldiers remain. There’s nothing to note.

Even if, as is likely, Trump’s advisors wanted to send a message to Iran about the benefits of yielding to U.S. demands through North Korea—which is what President G.W. Bush ostensibly tried to do with Libya in 2000—the Singapore summit was largely a non-event.

And where defense stocks are concerned, this outcome could not have been better. Analysts might describe the summit’s resolution most optimistically as vague.

Even in terms of the timetable of “actionable” commitments, there are few specifics.

Vague Results Leave Room for Ambiguity and Risk

What commitments are noted are hardly new. The Trump-Kim meeting cannot even be compared to the Reagan-Gorbachev one in Geneva in 1985.

On that occasion, the U.S. president and Soviet leader engaged in a longer and deeper conversation. Importantly, they agreed to meet again.

A series of talks producing concrete nuclear disarmament treaties followed.

In North Korea’s case, that country pulled out a “nuke” card just to bring the U.S. to talks. And that might be enough for now.

The North Korean leader, as any dictator or democratically elected representative will agree, has no intention of losing his job.

For Kim Jong-un, pushing for peace and reconciliation could—as Gorbachev found out—end with his inevitable relegation to irrelevance.

Meanwhile, too many concessions too soon would compromise the regime and his cronies’ authority.

It’s no wonder, therefore, that the notion of “verifiable and irreversible” denuclearization was kept out of the final statement. And that should keep owners of defense stocks happy.

Sooner or later, Trump may realize that the summit has given Kim several points. In football terms, Kim scored a touchdown. Trump did not.

Could this be by design? After all, the uber war hawk who urged the bombing of several countries, John Bolton, attended the summit.

By leaving Kim feeling “secure,” the U.S. can use more deception.

Trump’s “Trump Card”

Trump does have a “trump” card of his own. He has legitimized Kim, magnifying his international standing; he’s made Kim a star.

And that’s why the U.S. president can also and just as easily embarrass him. He can “fire” him, in case the Supreme Leader decides to change his mind.

And there’s plenty that could go wrong. In Pyongyang, Kim Jong-un will face difficulties, trying to explain what happened in Singapore. And he can’t risk opening the country—politically.

That’s why, for all the talk of reunification and a final peace, it’s unlikely to happen.

Ultimately, the most significant achievement of the Trump-Kim summit will be a short-term—more a matter of weeks than months—respite in geopolitical risk in the Asia-Pacific region.

It will give South Koreans enough time and peace to enjoy their team’s performance at the 2018 FIFA World Cup in Russia.

As for the defense stocks and the threat of peace, it’s no time to worry yet. For every North Korea summit, there are two or three Middle East situations that could draw the United States into a full-scale conflict.

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