1. What’s More Dangerous than a North Korean ICBM? Answer: an SLBM

    My friends at the Pentagon love acronyms. They throw them around all the time, and listeners who can’t keep up are left in the dust (and have to look them up when they get back to their offices).

    You’ll hear phrases like, “OSD sent me to ONA for CFIUS TD.” (Translation: “The Secretary of Defense asked me to report to the Office of Net Assessment for temporary duty on matters related to the Committee on Foreign Investment in the United States.”). You get the idea.

    Even non-experts know that “ICBM” stands for intercontinental ballistic missile. These are the kinds of missiles that go into space, cross oceans, reenter the atmosphere, and hit enemy targets on other continents. (See the story above for the latest on North Korea’s progress in building ICBMs). But, what’s an “SLBM?”

    That stands for submarine launched ballistic missile. These missiles may be the most dangerous of all because the launch pads are submarines that can be moved continuously and are difficult to pinpoint and defeat. The range of SLBMs is not as great as ICBMs, but it doesn’t have to be because the submarine launchers can cross the ocean and fire from relatively close proximity to the target. 

    This article shows that North Korea and Kim Jong Un are devoting just as many resources to perfecting their SLBM technology as their ICBM technology. This is one more existential threat to the U.S. mainland, and one more reason why war seems almost inevitable at this stage.

  2. Kim Jong Un Joins the Big Leagues in Missile Technology. Game Over?

    The near three-month hiatus in North Korean strategic weapons tests is now over. Kim Jong Un had maintained a rapid operational tempo of nuclear bomb and ballistic missile tests throughout 2016 and 2017.

    These tests included progressively more powerful and more reliable missiles and North Korea’s first hydrogen bomb (exponentially more destructive than an atomic bomb) on September 3, 2017. Then Kim seemed to go quiet. There were no tests for almost three months, from September 3 to November 28.

    Analysts speculate on the possible reasons for this. Some said that Kim’s testing capabilities were degraded by the collapse of a tunnel in the main underground testing facilities that killed several hundred workers and technicians. (The tunnel collapse could affect bomb testing, but would not directly impact missile tests).

    Others said that Kim had to address internal political concerns resulting from sanctions, although there is no evidence that the Kim dynasty has ever cared much about the welfare of their people. Finally, some speculated that Kim was making a show of goodwill toward the U.S. in a search for dialogue and sanctions relief.

    This was surely wishful thinking since Kim could have had dialogue and sanctions relief years ago without a show of force. The more likely explanation is that Kim did not want to be overly provocative by testing during the Chinese Communist Party Congress in October, and the Trump-Xi summit meeting in Beijing in early November.

    Now that both of those political events are over, it’s back to business as usual for Kim, as this article shows. Unfortunately, this new missile was not just more of the same. It’s larger and more powerful with greater range than any missile North Korea has tested before.

    It exhibits a rounded nosecone (instead of a narrow pointed nosecone), which indicates the potential to carry multiple warheads and improves reentry capability. Most threatening of all is that the indicated striking distance of the new missile includes almost all of the continental U.S. and Europe — something Kim has not achieved before.

    The U.S. has made it clear than Kim will not be allowed to posses a nuclear arsenal that threatens the U.S. Kim is on a path to do exactly that. This makes war likely in a matter of months.

  3. Catalonia’s “Succession” from Spain was Fake News.

    A few weeks ago the media were filled with stories about the Catalonia “seceding” from Spain and setting itself up as an independent republic. There were mass demonstrations in the streets, some violence, and a determined band of secessionist political leaders giving incendiary speeches.

    The breathless media reporting referred to a “referendum” (which the Spanish government declared illegal and did everything possible to stop), which purported to show 90% of Catalans supported separating from Spain. As a result, Spanish markets sold off, and the euro declined on fears that secession in Catalonia would embolden other separatist movements in Flanders, Milan, and elsewhere.

    Suddenly the story has gone away. The separatist leaders are in jail or are fugitives abroad. Calm has returned to Barcelona, the largest city in Catalonia. Spanish markets and the euro have both rebounded. What happened?

    It turns out that a lot of the reporting was fake news. The 90% polling result was completely skewed because anti-secessionists refused to participate. The “vote” was self-selected for those favoring secession and not representative of the total population. As this article shows, a more scientific poll found that only about 25% of Catalans actually support secession.

    The lesson for investors is an obvious one. You need to ignore the hysterical, and focus on the historical. Spain was scarred for decades by the Spanish Civil War of the 1930s. Those wounds have barely healed, and today’s Spaniards don’t want to reopen them by fighting another civil war in Catalonia.

    The sell-off was a great time to pick up Spanish stocks on the cheap.

  4. There Are No Good Options for China. It’s Either a Recession or a Crash.

    What’s next for China now that the Communist Party Congress is over and President Xi has solidified his power as the strongest Chinese ruler since Mao Zedong? China’s problems are well-known, including excessive non-payable debt, capital flight, corruption, pollution, and wasted infrastructure investment.

    The expectation is that President Xi will begin to address these structural problems from a platform of political strength. If he fails to do so, China will face an unpleasant choice between a financial collapse (with emergency government bailouts to follow) or a “lost decade” of slow growth because of the debt overhang.

    On the other hand, if Xi does take concerted action to write off bad debts, close insolvent state-owned enterprises, eliminate excess capacity, and redirect resources from wasted investment to consumption, China will face a sharp severe recession that could be socially destabilizing as unemployment temporarily soars.

    Given the choice between a sharp immediate correction, and a long, drawn-out “lost decade” politicians usually opt for the latter (Japan after 1989, and the U.S. after 2008 are good examples). This article describes some of Xi’s early reform steps, which are giving investors a serious wake-up call.

    The Chinese stock market has sold off sharply in recent days. But, it still appears that despite the reforms, Xi is pursuing a moderate approach not a radical approach. The problem is that the Chinese economy is so large that even a moderate slowdown will negatively impact economic growth in much of the world including Australia, Canada, Southeast Asia and even the U.S.

    The weakness in Chinese stocks today may soon carry over to U.S. stocks as it did in August 2015 and January 2016. What happens in China doesn’t stay in China.

  5. The Tax Man Cometh, and This Time He Has Bitcoin in the Crosshairs.

    I’ve warned for years that bitcoin enthusiasts were living in a La-La Land when it comes to taxes and regulations. Now the substance of those warnings is becoming the new reality for bitcoiners.

    Originally bitcoin was embraced by tekkies, libertarians, and anarcho-capitalists as a way to escape regulation, and other forms of government control. Their mantra was that ownership of bitcoin through the blockchain was distributed and encrypted and did not require any regulated financial intermediary to keep records or engender trust.

    The motto of the bitcoin crowd was, “In Math We Trust.” There are many flaws in this view, but the most obvious, and the one I pointed to repeatedly, has to do with taxes. When you buy a bitcoin for $1,000, and sell or exchange it at a time when the value has increased to, say, $10,000, you are required to report a $9,000 gain on your U.S. tax return. It’s no different than buying and selling IBM or Citigroup stocks.

    Just because the bitcoin is digital and encrypted does not make it tax exempt. It’s impossible to know how many bitcoin transactions were properly reported for tax purposes, but my estimate is that the number is quite low. Bitcoiners had a “catch me if you can” attitude toward tax compliance and the IRS.

    Now according to this article, the empire has struck back. The IRS was successful in getting a Federal court to order one of the largest bitcoin exchanges to hand over certain customer information including names, addresses, social security numbers, and more.

    If the exchanges don’t keep this information, they’re guilty of anti-money laundering violations and all of the accounts can be frozen. If the exchanges do have the information, they’ll hand it over and the IRS will come knocking on the customers’ doors.

    The IRS won’t stop there. They’ll play hardball to get the bitcoin customers to reveal names of counterparties or face jail time. This is just the beginning of an all-out assault on bitcoin from the IRS, SEC, FBI, and bank regulators. The best advice to investors is keep away from bitcoin to avoid getting caught in the dragnet.