Peace in Korea Could Be a Catalyst for U.S. Economic Collapse
Hopefully, even if peace has come between South Korea and North Korea, Kim Jong-un will decide to keep his nuclear program. It’s the only guarantee of surviving should Washington hatch a plan for regime change in Pyongyang.
A hostile North Korea also benefits the U.S. defense sector’s performance on Wall Street. Peace, on the other hand, could be the black swan that triggers the economic collapse that everyone fears.
So long as cheap thinking prevails in Washington, the defense sector must remain well funded. Otherwise, the specter of economic collapse will hover over Wall Street.
And while the situation may appear dire for the contractors relying on the perpetuation of war, the defense sector will survive this peace.
Few have dared question, let alone mention in polite company, the extent to which the performance of the Dow Jones relies on defense contractors. Few, given the performance of Lockheed Martin Corporation (NYSE:LMT) or Northrop Grumman Corporation (NYSE:NOC) in the past few years, would deny the strength of these stocks.
Fear Drives Defense Spending
The fuel, if you will, that keeps defense stocks moving ever higher is fear. The more that Washington can persuade the public that the United States faces threats around the world, the higher defense stocks move.
Threats drive innovation. In World War II, even as fighting ravaged Europe and the Pacific rim, technology advanced at a pace that history has not managed to replicate.
The Germans started the war in 1939 with piston-powered propeller airplanes topping 300 miles per hour. The world ended the war with jet-powered planes, able to fly near the speed of sound. Thus, there’s no question that threats and the drive to win accelerate technological development.
Moreover, the U.S. defense system has become far more “offensive” than “defensive.”
Especially since the end of the Cold War, the military-industrial complex has focused on developing new weapon systems to address the Pentagon’s wars of aggression, like those in Afghanistan and Iraq.
Without a threat, especially a nuclear one, the Pentagon will find it harder to persuade Congress and the American people that it needs more of their tax dollars for “defense.” Just like what happened in the 1990s, the defense industry might have to rationalize.
The defense contractors will be driven to merge. In the 1990s, for example, Boeing Co (NYSE:BA) merged with McDonnell Douglas, and Lockheed Corporation merged with Martin Marietta Corporation to form Lockheed Martin Corporation.
Therefore, even though defense stocks are all trading at or near their record highs, major and peaceful geopolitical developments threaten to shrink them. Such is the defense sector’s weight on the Dow Jones that it could trigger a market crash and possibly an economic collapse.
Trump’s Threats Against North Korea Were a Boon for the Defense Sector
Defense stocks went ballistic after Trump threatened to attack North Korea in the summer of 2017. Indeed, investors seemed bullish instead of bearish on the overall market.
Expect the reverse logic as the Koreas are sending olive branches across their borders instead of verbal shibboleths and military exercises.
Trump’s wild accusations in 2017, pressure from China (advising Kim Jong-un to tone down the rhetoric), and the traditional left-oriented government of South Korean Prime Minister Moon Jae-in delivered peace.
And investors could not care less. Had the Korean leaders fumbled their meeting in Panmunjom, defense stocks would probably have taken off for unexplored corners of the Dow Jones universe.
Instead, the big ones like Lockheed Martin dropped. Is this a sign that the much-feared economic collapse has arrived?
As convinced as Americans should be about the sincerity of the Kim-Moon peace intentions and talks, they should have doubts about the plan having the full backing of the United States.
The two Koreas have gotten to the point of demilitarizing the peninsula so quickly—and stealthily—it’s as if the point was to avoid U.S. involvement.
Will Trump Win the Nobel Peace Prize?
There are calls for the Norwegian Nobel Committee to award the 2018 Nobel Peace Prize to President Donald Trump. What better way to upstage Barack Obama than to win a peace prize for events leading to actual peace?
Yet, that would upset investors. A peace prize would indicate that Trump holds peaceful intentions for his foreign policy. That hardly represents the most dependable approach to ensuring that defense stocks remain at their lofty prices.
What’s more, a peace prize would seal the economic collapse scenario that would occur if defense stocks were to collapse.
Not All Is Lost for Defense Spending
As enthusiastic as Trump might be about bragging to Obama about a Nobel prize, the Pentagon and intelligence apparatus might dissuade him from meeting Kim Jong-un.
Whether in the demilitarized zone (DMZ) separating North and South Korea, or in Washington, Kim Jong-un has plenty of examples that warn against giving up too many cards.
The last Chairman of the Supreme Soviet of the USSR, Mikhail Gorbachev, was forced to learn a tough lesson. He enthusiastically gave up everything. He agreed to break up the Warsaw Pact and reduce nuclear missiles and military spending.
Gorbachev released the Soviet republics to become independent states. And now, the North Atlantic Treaty Organization (NATO) is breathing down Moscow’s neck, having absorbed many of those former republics and satellite states into its organization.
The Libyan leader Muammar Gaddafi, were he alive, might also have some advice for Kim Jong-un.
Gaddafi had announced that Libya would give up weapons of mass destruction and terminate its nuclear program. Libya did that and got a few years of relief. It was just enough for Gaddafi to get comfortable and trust the West, when those he trusted attacked him and sent Libya back to the wilderness.
Kim Jong-un probably understands better than to give in, just so Trump can get a Nobel Prize.
Hapless Foreign Policy Keeps Ally and Foe on Edge
Moreover, Trump’s foreign policy has been hapless. It’s not his fault. The Pentagon and such eminent “peace promoters” as National Security Adviser John Bolton have hijacked it at every turn.
The United States could not wish for worse relations with Russia, to the delight of defense contractors. And there’s a realistic menace of World War III breaking out.
The Pentagon, in other words, will insist on maintaining U.S. nuclear missiles in the Korean Peninsula at least until the North and South unite—that is, if they unite.
The U.S. has three militaries, 28,000 combat-ready troops, and 950 nuclear bombs (with assorted delivery platforms, from rockets to nuclear shell shooting howitzers) at the DMZ. (Source: “What Does ‘Denuclearization’ Mean in the Negotiations for an End to the Korean War?,” CounterPunch, April 30, 2018.)
What are the chances that the troops and hardware are going to make like Dorothy and go back to Kansas?
“Not likely” is the best answer. The USSR collapsed 27 years ago. Yet, U.S. troops and nuclear bombs are still stationed all over Europe.
Thus, investors in defense stocks (and the rest of us) need not worry about U.S. economic collapse (yet). There are more chances of an economic collapse occurring because the U.S. has accrued a massive debt by spending tens of trillions of dollars on defense since World War II.
This debt prevents Washington from diverting funds to maintain and upgrade infrastructure. The 2017 tax cuts, which include permanent cuts for corporations and high-income Americans, don’t bode well for the U.S. economy.
But rest assured, even if you are unemployed and homeless, you shall be well defended by the most advanced military equipment that taxpayers’ money can buy.
Netanyahu Saves the Day
Just in time for the skeptics who still fear that the Korean peace process has hurt the defense sector comes Benjamin Netanyahu with another nuclear bombshell about Iran.
Speaking from what seemed like a pulpit platform, Netanyahu claimed that he had 55,000 documents and another 55,000 files copied from Iranian secret archives on CDs. The files allegedly demonstrate that Iran is still pursuing a nuclear weapons program.
Netanyahu updated his 2013 UN presentation about Iran’s nuclear weapons from paper to “PowerPoint.” He discussed well-known facts about the program dating back to the early 2000s, but he packaged them in a way that demands urgent action.
Netanyahu, who met U.S. arch-neoconservative Secretary of State Mike Pompeo in the days before the presentation, sent a clear message. The U.S. will either significantly alter or pull out of the Iran nuclear deal.
If that happens, Iran will have little choice but to resume developing nuclear weapons—and fast. That is great news for those who invest in defense companies.
The U.S. Will Become Even More Engaged in the Middle East
The United States and Israel will play a bigger role in the Syrian conflict. Israel continues to attack Syrian military bases, supporting Iranian troops. Americans will put more pressure on Iran and, one way or another, they will prepare an attack.
A new phase of the Syrian War has opened. It will keep the dollar taps flowing to defense companies because more war with Syria means higher tensions with Russia.
Trump wants to replace U.S. troops with Saudi and Qatari troops, while Israel and Turkey are waiting for the Russians to come back to grab what they can in a new and wilder edition of the Sykes-Picot agreement.
Whoever claims that Bashar al-Assad should abandon Syria like Zine El Abidine Ben Ali did with Tunisia does not understand what is at stake. It would be genocide—and not just for the Alawites.
The only solution that could avoid the conflict in Syria from spreading would be to make Syria an integral part of the Russian Federation. Like Crimea.
Any alternative would perpetuate the war into something unfathomably dangerous that would leave nobody caring about stock prices.
Alas, an economic collapse would be avoided, as far as the defense stocks go. But beware of the other risks.