April 8, 2013
- “Those guys want their virgins in this world, not the next,” says one observer. Yet the North Koreans are pushing their luck, warns Byron King
- Growing sell-off risk as earnings season begins? Why Greg Guenthner isn’t counting on it. Plus, Chris Mayer on a boring sector that’s still dirt-cheap
- “Going dark” — the encrypted messages the feds can’t crack, and the one company most set to profit
- After Cyprus: Casey diagnoses clinical stupidity for anyone who keeps more than a few months’ expenses in a bank
“Nobody actually wants to go to war,” suggests the Cato Institute’s Doug Bandow of the situation on the Korean peninsula.
“The North would lose. Those guys want their virgins in this world, not the next. They live well at the top, they’re not interested in war.
“From an American or South Korean standpoint, it would also be nutty. No one gains. Seoul would probably be destroyed even though the South would win. We obviously would get nothing out of it… Everybody’s posturing and threatening over it’s not even clear what.”
It’s tempting to dismiss the bluster from North Korea as more of the same.
Every spring, the U.S. and South Korea carry out joint military exercises, and every spring the North responds by issuing dire threats, declaring the 1953 cease-fire to be over, and generally stamping its feet.
Then there’s what passes for propaganda from the North. Behold the amazing technology at the fingertips of the Supreme Leader!
“And the left arrow takes you back to the page you just visited.” (Dig the Logitech mouse…)
Sure, they conduct nuclear tests, and they test-fire missiles now and then that appear to be little more accurate than Saddam Hussein’s SCUDs during the 1991 Gulf War. And how much of the country’s limited electric grid has to be shut down just to spin the nuclear centrifuges?
Only a war could create a blackout like this… or 60 years of hereditary communist rule…
“When it comes to North Korea,” says our Byron King, “you have to be careful not to think too much like a Westerner — especially like an American! You have to try (as best as anyone can) to think like a North Korean.”
Byron is in Washington this week at a conference on military technology and national security. “Entrance is strictly controlled, so it helps that I’m an old Navy salt. No photos are allowed. It’s that kind of conference.” Given the headlines, it’s no surprise North Korea is all the talk during coffee breaks and in the exhibition hall.
“North Korea’s army,” he says, “has over a million men under arms, which is 2½ times the size of the entire U.S. Army. This million-man force includes a large fraction of North Korea’s able-bodied young males — which has much to do with chronic shortages in food production from North Korean fields and farms.
“Large swaths of North Korea’s economy are dedicated to what’s called an ‘Army First’ policy. That is, military production — in particular activities that employ energy and mineral resources — takes complete priority over everything else within the economic planning process.”
Including reliable electricity, it would seem…
“In the past, the North Koreans have rattled sabers and blown war trumpets, with the expectation that the U.S., South Korea and/or Japan would fork over money, food aid, oil or other goodies.
“Plus, the Northerners enjoy the idea that when they bang their drums, the imperialists come forth and ‘negotiate,’ which the North Korean leadership often likens to their enemies groveling at their feet.”
“But now,” says Byron, “having turned on the tough-guy rhetoric and heated things up to a ‘nuclear war’ level, where do things go from here?” Or will the North’s virgins have to wait till the next world after all?
On Friday, North Korea’s foreign ministry sent notice to all the embassies in the capital Pyongyang that in the event of war, it would be unable to guarantee the safety of diplomatic personnel after April 10 — this Wednesday. Press reports in South Korea say that South Korean factory workers in the North were also told to get out by this Wednesday.
That adds up to bad news in the estimation of NightWatch, a letter put out by the private intel outfit Kforce Government Solutions. “NightWatch judges that North Korea intends to take military actions that will risk general war, but will be short of the start of general war. However, North Korea will be prepared for escalation to general war instantly.
“Thus far, the public statements and other evidence indicate the military actions are likely to include missile launches against U.S. bases, such as Guam, and a shooting incident against South Korean forces, such as those on the islands off the west coast. The North Koreans told the embassies that this can occur anytime after 10 April. The Allies must assume they mean it.”
Nor do the worries end there.
“What if some simple soldier fires the first shot by mistake?” says Byron. “Let’s say that a bullet — or an artillery shell — flies in the wrong direction. Could that trigger a quick and violent escalation?”
“An accidental clash at sea, in the air, or along the Demilitarized Zone dividing the two Koreas could quickly escalate to war,” adds veteran war correspondent Eric Margolis, who’s seen the DMZ up close and personal.
“It will be difficult to defeat North Korea unless its army turns on the Kim dynasty,” says Margolis. “An invasion of North Korea would prove a risky operation that might invite Chinese intervention, as it did in 1950. However, the U.S. has hinted over the years that it may use tactical nuclear weapons to halt another North Korean invasion of South Korea.”
[Ed. note: Let’s hope cooler heads prevail. In the meantime, Byron is scoping out new ideas at that conference in Washington for his new high-end advisory Military-Tech Alert. Right now the service is in beta test mode, but if you subscribe to one of Byron’s existing services, you’ll want to keep an eye on your inbox this week to learn how you can get access.]
Stocks are generally in the red this morning, carrying over from last week. The Dow sits only a few points above 14,500. The S&P rests uncomfortably at 1,550.
Earnings season starts after the close today, when Alcoa reports. Bed Bath & Beyond reports later in the week, and the big banks begin reporting on Friday.
“I doubt lumpy earnings will be the catalyst for a mammoth sell-off,” says our Greg Guenthner.
“The market is — in all likelihood — anticipating a weak first quarter,” writes Greg. “That’s because most companies have already come out with crummy guidance. More than three-quarters of S&P 500 companies issued negative guidance, according to CBS News. It’s not new information. So until we see some really catastrophic misses, it will remain business as usual.”
You don’t have to look at long-term bear markets as a disaster, says our value guru Chris Mayer; instead, look at bear markets as a value-laden opportunity. “You may even look forward to it — if you own the right kind of ideas,” writes Chris.
Chris recently attended the New York Society of Security Analysts’ Annual Insurance Industry Conference, coming away with a handful of cheap stocks to research for his readers.
“It is not hard to find good stocks trading below book value,” continues Chris. “In the SNL Insurance Underwriters Index, for example, there are 71 property and casualty stocks. The median price-to-book ratio is just 0.9. In good times, insurance stocks trade for healthy premiums…
“One thing that struck me in listening to several of these presentations was how much value a management team can add when stock prices are low.”
In today’s 5 PRO, we profile a property and casualty insurer that created a huge amount of shareholder value when its stock price was low…
Gold is backsliding after Friday’s rally. At last check, the Midas metal is down to $1,570. Silver’s holding up better at $27.23.
FBI director Robert Mueller calls it “Going Dark” — means of communication using encryption so powerful the feds can’t crack it.
“Encryption used in Apple’s iMessage chat service,” reports CNET’s fearless Declan McCullagh, “has stymied attempts by federal drug enforcement agents to eavesdrop on suspects’ conversations,” according to a document uncovered by McCullagh and colleague Jennifer Van Grove.
Even with a court order approved by a federal judge, the Drug Enforcement Administration is unable to crack iMessages between two Apple devices.
IMessage is the most popular encrypted chat program in history: Last fall, Apple CEO Tim Cook said 300 billion messages have been sent since launch in mid-2011.
That’s a powerful endorsement of a technology first developed by a company with a market cap 1/400th the size of Apple’s. Indeed, Apple lost a patent lawsuit to the smaller firm six weeks ago. “The parties have been ordered to engage in mediation talks over a royalty and licensing agreement,” says Ray Blanco of our high-tech/biotech team.
But a modest payout from Apple isn’t where the company will make its money. Nor a successful outcome to other patent litigation, says Ray. “If its patents are successfully defended, the company will be entitled to a royalty from all future LTE Advanced mobile devices” — that is, every new 4G phone that will come to market. No wonder Ray put this firm in the Technology Profits Confidential portfolio.
“I think this could be the spark that ignites the keg of dynamite under the current financial system,” says Doug Casey of the situation in Cyprus.
“All banks, all around the world, are bankrupt, and have been for years. That’s because all the world’s banks run on a fractional reserve basis.” That is, they keep only a fraction of their deposits on hand, lending out the rest.
“Cyprus was a banking epicenter for Europe. It was easier to make deposits — there were fewer questions asked — making banking the major business of the country. But I think the trouble will spread from there. It could spread to Luxembourg or Malta next; both are at least as leveraged to the financial sector as Cyprus. And from there… who knows?”
Bottom line: Cyprus won’t be the first “bail-in,” where depositors get “haircuts” — more like a scalping, given recent reports of 60% losses when all’s said and done.
“I cannot stress strongly enough that I think anyone who chooses to keep a significant amount of money in any bank is patently stupid. I mean that in the technical sense of stupidity — being an unwitting tendency toward self-destruction.
“Just keep enough cash [in the bank] for a few months’ expenses,” he says as a practical matter. Gold, on the other hand, “is the only financial asset that is not simultaneously somebody else’s liability.”
The Laissez Faire Club has a poll going right now, asking if you think a Cyprus-type event could happen in the United States. To take part and see the results, follow this link.
“Canada is setting up legislation for Cyprus-style looting of citizens’ bank deposits,” a reader writes. Buried within Canada’s annual budget is this passage on Pages 144-145:
The Government proposes to implement a ‘bail-in’ regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers.
“I am appalled,” the reader says. “I had no idea this was happening. From what I understand, the wording of the bill includes ‘at least uninsured deposits over $100,000’ to be included in ‘the very rapid conversion of certain bank liabilities into regulatory capital.’
“I found the part about ‘[Press secretary Kathleen] Perchaluk said Ottawa’s move is in line with recent international agreements.’ I assume these agreements will likely be with the U.S. as one party. Perhaps your research department could check it out. We as readers would most likely find it very interesting.”
The 5: Yes, it goes back to standards set up by the Bank for International Settlements — the central bank of central banks — in 2009.
Last December, the FDIC and the Bank of England issued a paper with the spellbinding title Resolving Globally Active, Systemically Important, Financial Institutions. It says explicitly that depositors are unsecured creditors, and that regulators should have the authority to turn deposits of a “troubled” bank into stock: “The new equity would become capital in one or more newly formed operating entities.”
So far, in the U.S., it’s just talk. Congress would have to pass enabling legislation. No doubt it would be buried in a defense funding bill or somewhere else no one would notice.
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. Of course, we’re not trying to lead you any one direction if you respond to our poll. Heh…