Korea’s Consequence

A quick word on the expectations I have for this breakout on the Korean peninsula.

This isn’t necessarily going to escalate into full blown war.  Remember, the North already sank a South Korean ship and killed considerably more people than this, only a short while ago.  South Korea, in the broad scheme of things, has suffered far less than that in this attack, and they seem to have dealt an equivalent blow back, which is more than can be said from the previous encounter.

However, these things tend to cumulate rather than be initiated by one single action.  I’d guess, given the recent surge of violence, something big is preparing to breakout.  And, I think it’s going to be predominantly on the North’s side.

There’s something big going on up there.  Kim Jong Il is of questionable health, and his successor is, from my understanding, relatively weak and unknown.  By escalating war with the South, they may be attempting to manufacture public support for the young warlord-to-be.  As it is, several American Foreign Policy members have been advocating trying the young ruler when he comes to power, and trying to get some of the second in command types to create fissures in the government.  Kim Jong Il isn’t completely dumb, and he definitely has finesse with manipulating his own population.  This could be as simple as him trying to hold the nation together by lashing out at a common enemy.

That being said, I’m not particularly worried about a Korean war breaking out.  The North has too much to lose with a massive crisis.  It is a rather humorous reality that having the largest standing army in the world is irrelevant when dealing with the kind of large scale poverty that country has.

Millions of malnourished troops with poor morale just aren’t that big of a threat.

The real problem here is going to be relations with China.  Look for negotiations between the U.S. and China to get a feel for how things are going.  China has a serious bit of leverage in this situation, as they can effectively tell the North to sit down and shut up.

No?  Then no more food…

In fact China itself should have no desire to let a war flare up in its own backyard.  Consider, as I showed on the Fly’s post, Macau is raking in huge growth from the South Koreans  That’s all grand cash for the island vis-à-vis for China.  A North verse South war spoils all that.

Here’s the link: http://www.bloomberg.com/news/2010-11-23/macau-s-october-visitor-arrivals-summary-table-.html?cmpid=msnmoney

But, China has a lot to gain by playing hard ball with the U.S.  For instance, if I was a Chinese autocrat, I’d be tempted to play chicken with U.S. policymakers to get some of this criticism of their currency manipulation off the airwaves.  I’d also be getting tired of U.S. Congressmen criticizing Chinese exports as the cause for U.S. unemployment.

In stocks, I’d be tempted to take some cash off of the major casinos, immediately, if I weren’t in MGM specifically.  The other major players who are already in full recovery are going to get hit hard, particularly if Seoul residents start to feel like they should conserve for a grueling bout of hardships.  The second largest growth prospect for Macau right now is India, and in the last three months that’s been at a great distant second.

That being said, I don’t think MGM, specifically, is in a recovery yet.  Not so much as an anticipation of a recovery.  So, dropping it doesn’t make as much sense.  They’ll be no more screwed if Macau gets hit than they already are.  But, if you’re holding the other major casino operators, keep your head low and look for an opportunity to buy in at lower pricing.

Elsewhere, I never really trusted Asian stocks anyway, so there’s not much insight I can give specifically.  But, as I said, I don’t think China will really allow this to go down.  It could prove a big dip buying opportunity, and that’s the way I’d be ultimately tempted to play it, if there was any quality Asian company which I cared to own.  In the casino space, I’m not selling, but that would probably be my biggest temptation; buy up non-MGM casinos after panic from soon to be realized exposure, in anticipation that the exposure is overblown.

More importantly, on the currency front, this could be ground for agreements that keep the status quo for the Dollar/Renminbi as is, which could be significant for our markets, depending on what’s baked in.

I don’t know.  Maybe we just tell China we don’t care if war breaks out and let them handle it?  But I think our politicians are too nosy for that sort of self restraint.

I really don’t like how much leverage this gives China.

If you enjoy the content at iBankCoin, please follow us on Twitter