Cozy With Kim

The world is still euphoric over the “Make America Fourth Again” performance at the Olympics. Let’s be frank; the world loves to see America take one on the chin. More importantly, the games were executed flawlessly by the South Koreans. The Winter Games showcased world-class venues and the peaceful interactions among nations. The unparalleled beauty of Pyeongchang was matched only by the South Korean’s generosity of spirit. These games set a high bar; experiencing neither the weather challenges faced by Vancouver and Sochi nor the anticipated threat from the North. While not unprecedented, the North and South participated as a unified team. This partnership showed diplomatic savvy and was exactly the right move.

Last week, sitting in the same VIP reviewing box (at the closing ceremony), were Ivanka Trump and North Korean General Kim Yong Chol (head of North Korea’s Civilian Intelligence). Of course, the North Korean regime would send a prominent leader who, as an intelligence professional, is experienced and nuanced in the art of collection. North Korea would never squander the opportunity to score propaganda points and acquire some direct feedback on their efforts to “wedge” Washington and Seoul apart.

General Kim’s history is significant. Remember, he was blamed for the 2010 attacks on the South Korean warship Cheonan (killing 46 sailors) as well as the 2014 cyber-attack against Sony Pictures. He was personally sanctioned three times by both Washington and Seoul. At the Olympics, North Korea snatched the strategic lead from South Korea by simply showing up and not creating mischief or breaking anything. That’s a low bar, but one the North will continue to step over. US-North Korea relations can be characterized as volatile and episodic. We never fully engage in the long game with the North; it has been impossible, and the North prefers it that way. The dynamic is a never-ending back and forth. They bang the gong; we silence it but never take it away.

I operate under a measured optimism; this relative calm too shall pass. While serving as the lead intelligence officer on the Korean Peninsula, I witnessed the evolution of the Nobel Prize-winning Sunshine Policy. This policy was meant to soften tensions between the North and South, opening lines of communication, leading to reform. To some degree, it achieved its ends. However, South Korea built infrastructure and supplied aid to the North, only to be betrayed by the continued military provocation of North Korea.

Last Friday, the US issued a fresh set of sanctions against North Korea, the “largest ever” according to President Trump. A solution on the Korean Peninsula must be initiated with small, discernable steps, followed by enforced consequences for failure to meet international standards. Sadly, this is something the global community has never accomplished. Publicly, President Trump appears willing to take distinct actions to achieve results with North Korea saying, “If the sanctions don’t work we’ll have to go to phase two – and phase two may be a very rough thing, may be very, very unfortunate for the world.”

In today’s world of volatility, measured calm may be the best we can hope for, but we know hope alone is a failure. To maintain stability, and to ensure we don’t see Sunshine Policy version 2.0, the US-ROK military coalition must remain strong. It is.

Our world is volatile and ambiguous. The success of the Olympic games is no reason to assume anything has altered that reality. The United States and its allies must maintain their diligence and project their power or risk losing this measured calm.

“Markets have acclimated to the new status quo of ‘measured calm’ on the Peninsula. Any indicators of progress towards a real and lasting solution would be rewarded with stocks rising. Markets would not be surprised to see a return to periodic posturing within the context of measured calm. The difficulty for markets and policymakers is that moving beyond measured calm would be very disruptive for stocks and bonds. Stocks would be impacted as concern about global trade increases. Bonds and the U.S. dollar might not benefit – unlike in traditional ‘risk-off’ situations. In the past, the US dollar benefitted when tensions increased; however, our involvement is so direct in this case, it’s predictable that the Euro would benefit.

Similarly, treasury bonds usually rally in a ‘flight to quality’ trade which helps mitigate the damage to stocks. With China (a large holder of treasuries) most certainly caught in the middle of any conflict on the peninsula, we might not see a flight to quality in the traditional sense. This would put a significant strain on stocks and the economy.

General Marks acknowledged the importance of a strong military in our dealings with North Korea; this imperative also holds true for the markets and economy. A powerful military is neither a luxury nor a given.”