Rhetoric is rhetoric, but when the Chinese, who we could say supports the North Koreans with 85-90% of everything they need, from oil and gas to diplomatic protection, trade and weapons sales, finally step in as the George Washington Aircraft Carrier Strike Group rolls into their backyard, you know this isn't just rhetorical posturing ahead of talks.
When the North Koreans torpedoed a South Korean warship earlier in the year, China maintained North Korea's plausible deniability despite evidence recovered from the sea floor showing it to be a North Korean torpedo. The Chinese simply claimed the investigative team was biased. However the latest shelling of a South Korean island, killing civilians and military personnel was too clear cut for even the Chinese to protest innocence. So instead, the only country that has any real sway over the North, virtually sat on the fence, until last night.
Now the Chinese are calling for early December "Emergency Talks".
China's concerns are several fold. First a war in their backyard with American military engaged, would be an outrage to the ever increasing nationalistic Chinese public. Remember, this is the first time that American/South Korean drills have been conducted in the Yellow Sea, in the past, the Chinese protest has been so vigorous that drills were moved to the east side of the peninsula. This time, they protested, but not too much, so long as the US didn't enter their exclusive economic zone (200 miles of water off their coast), which is a significant concession.
A reunified Korea puts American military right in china's backyard, they don't want to see that either.
Also a war would lead to a mass exodus of Koreans flooding over the Chinese border, something else they don't want. So while China has an interest in maintaining a buffer-or the status quo, they don't really want to see much change.
Now we have the unpredictable North facing a formidable battle group in the Yellow Sea. One mis-targeted artillery shell, a break down in command and control or an outright coupe by North Korean Generals could be the ignition to War on the Peninsula.
I had mentioned in previous article's that Kim's son doesn't have the full trust and backing of the military and I mentioned both Kim and his son visited the artillery base that attacked the South just hours before, obviously trying to establish the son as credible with the North Korean military. Yesterday I was shocked when I dug up
this article/video, it's not just the military they have to fear, it's the population itself.
I'm a history buff, from religion thousands of years ago to things occuring now. I suppose it's because much like the market, history rhythms as Mark Twain said because nothing much changes about humans.
Before I get to the point of the article and the video above, let make a few personal observations. I'm married to someone who grew up under Soviet occupation in Hungary. In my travels to Europe, I've visited mostly Eastern Europe which was mostly behind the Iron Curtain. I've been in the Nazi Green Arrow movement's equivalent to the KGB headquarters complete with torture chambers and jail cells that were either so small that all you could do was stand in them, not sit, not turn around and not scratch an itch on your leg. Or others that were about 3 feet high and half filled with water with vents to let the freezing winter air into the cell. I've seen the tiled floor to Ceiling torture chamber complete with a hose, (all the tools of the trade) and a drain below the prisoner's chair. And finally the execution room, which was pretty much a tall wooden post with a noose around it, not the quick hanging that snaps the neck and kills someone instantly, but more like the Nuremberg hangings, when Nazis took up to 20 minutes to die. After the Nazis were defeated in Hungary by the Red Army, this building became the KGB local headquarters and all the same things were carried out by the Soviets there as well. It's a huge building and it is covered with black and white 4" discs with pictures of everyone who has went into that building and never come back out. I can't tell you how many thousands it would have been.
I've also seen the remnants of the Soviet occupation otherwise, including tanks, 100 ft tall bronze sculptures of Soviet soldiers or leaders, and the Soviet architecture called Social-realism that dots the landscape the nations. You can walk by an 400 year old Turkish Bath or some of the most interesting European architecture, and then right next to it see the Social-realism, 20 story, square gray box of a building. One reaches nearly a mile long.
Of course being married to a Hungarian and living in Florida, most of my friends are from all over the world: Ireland, Turkey, Germany, Italy, France, Hungary, Spain, Romania, Columbia, Ecuador, Argentina, Mexico, Trinidad, Jamaica, Haiti and one of the most impressive friends I've ever had, from Cuba.
My friend Juan.
When I first became interested in the stock market I was running a finishing department for an ultra-high end custom furniture company. Our typical jobs were a half million dollars, in $10 million dollar homes from South Florida to New York and Bermuda. I made a very good living working with toxic chemicals all day, I made a better choice to stop working with them. However, while I was there I hired a Cuban who barely spoke English and I think he made about $6 a hour at the time. His wife made less cleaning our employer's house. Being I have friends from all over the world all with different accents and ability to speak English, I've picked up bits and pieces of languages, for instance my Italian friend taught me enough Italian (which is very little) to communicate basics to my Cuban friend. The two languages are remarkably similar. I'm use to this situation and I have patience with people who are just learning English. I don't judge their intelligence based on how much English they speak and treat them all with the same respect I'd want to be treated with.
Juan ended up picking up English pretty fast. All I really knew about him was that he defected Cuba from somewhere in Scandinavia on a flight, not the typical Cuban crossing the Straight in a home made raft. In any case, he went from knowing nothing about what we did to being my number 2 man in 2 years and was making $27 an hour 2 years later. We became great friends and I learned his story. He lived in a small Cuban village 2 hours from Havana by foot. I know that because they walked to Havana to be married. It turns out this 28 year old Cuban was a professor at a University in Cuba. He worked on a project which was a reactor that took recyclable materials and other trash and burned it somehow in a reactor with no oxygen and then extracted the gasses and used them to create electricity. That's what he was working on in Scandinavia for 6 months, when he realized that everything he knew about life in Cuba was a disgrace and decided to defect to the U.S. working for $6 an hour and living with a family of 6 in a trailer. He since moved on and became a head design engineer for a large company that makes fixtures like Kohler and are sold in stores like Lowes and Home Depot. In about 7 years he went from making $6 an hour to purchasing a newly built $450,000 home. Since then he moved with the company and I'm sure is worth triple that amount now.
An impressive friend indeed and a great man. any way, back to the point. I asked him about life in Cuba, it's tragic. I asked him if he ever talked with his close friends about their hatred for Fidel Castro, he sternly told me "NEVER!" "Not even your best friend?", "NEVER!" he replied again. "What about your family, your wife?" He said to me, "Brandt, you don't talk about it because you don't even dare to think about it. You don't know any different and it took me 6 months in a free country to even start to question Fidel's character".
In any case, the video above I linked shows a North Korean woman openly and defiantly scolding a policeman who was trying to bribe her. This would never have happened in Cuba. I'm sure the suffering in North Korea is worse then Cuba, but people are openly defying the government now. There are serious questions about the loyalty of the Senior military officials and a transfer of power is coming on shaky footing. This is a powder keg.
As I have been saying with each of these articles, "THE MARKET HATES UNCERTAINTY", thus the Wall Street maxim, "When the missiles fly, it's time to buy". Are those just words? Take a look.
Below is the Dow 30 and the two invasions of Iraq.
The first red square is when Iraq rolled into Kuwait, having misjudged a communique by an American diplomat that indicated the US had no interest in what Iraq did in Kuwait. For whatever reason, this was not the case as Saddam had thought. On January 16th, the invasion of Iraq began, The market jumped +4.5% the next day. Not because the market especially loves war, but because the uncertainty had been resolved.
Above is the second invasion of Iraq under George W. Bush, this also marked the end of the Tech market meltdown and the base building that followed. This is the point at which the last Bull market kicked off.
Above is a 9 day chart. The first arrow to the left sows the market selling off in the middle of a secular bull market due to the invasion of Kuwait. Te next arrow is the rally on the invasion of Iraq. After September 11, 2001, you can see the market was gripped with uncertainty, until the day of the Invasion of Iraq (the chart above).
So today Zero Hedge publishes this article:
Smart Money Preparing For Sell-off
While Korea could be a catalyst, so could 100 other world events, we've seen for months now that smart money has been moving off the playing field through 3C distribution.
The Channel buster mentioned last week.
The daily 3C chart showing continued distribution into a leading negative divergence.
Friday's strange A.H. action and now fundamental data suggesting what we have known for awhile now.
Take a look back at the featured trades in articles of the last few weeks. I'll be updating the Trade List for tonight.
What we do know, whatever is behind this, the general outcome has been known for sometime since we saw the first indications accumulation for the rally in late August as the market continued lower. POMO was obviously known about in advance and appears to be a last ditch life line the Fed threw to the market. Otherwise, we should have sen some accumulation or at least confirmation of the rally. We have seen distribution starting at week one of the rally. Remember in a low volume environment such as what we have seen for sometime now, it takes time to move large positions without effecting the market and I guess it's good to have a quid pro quo relationship with the Fed. The second best thing for us, the little people is being able to see what smart money is doing-even when it doesn't make sense and defies logic and market movement, nonetheless, it appears that what we have been seeing is real. Think back to the distribution and nearly real time information we received when smart money came to defend the GM IPO that was ready to break $33. Or when 3C showed distribution in GLD, GLD's price broke it's strong uptrend and a week or two later we received confirmation that the Mega-fund PIMCO was selling gold at the same time we saw the GLD distribution. As usual, 3C shows us things that are difficult to understand at the time, but as I've said many times, I've learned not to argue with it, usually the reasons will come out later, but if you wait for the reasons, the chance to profit from them will be long gone.
So be on the lookout for an update tonight on the Trade List and please remember to set those alerts. You don't want to miss another 130+% move like what we saw in GOK or others. All it takes is an alert and risk management.
