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Investors Must Brace for 'Darker Days' in North Korean Crisis

Investors Must Brace for 'Darker Days' in North Korean Crisis

By    |   Tuesday, 05 September 2017 07:54 AM

The United States seems becoming rather angry with North Korea. Not “fire and fury” perhaps, but darker days could be on their way.

Now, in the meantime the Korean won is back to the levels of a couple of weeks ago.

However, it now looks like the Chinese are also becoming somewhat angrier with the U.S. sanctions threat against North Korea.

It might be good keeping in mind that China is North Korea's closest ally and commercial partner.

After President Donald Trump said on Twitter on Sunday that the United States is considering halting trade with “any country doing business with North Korea,” China sees this threat of sanctions as implicitly aimed at them.

On Monday, Geng Shuang, a Chinese Foreign Ministry spokesman, told reporters at a briefing in Beijing that China regarded as “unacceptable a situation in which on the one hand we work to resolve this issue peacefully but on the other hand our own interests are subject to sanctions and jeopardized.”

Geng said: “This is neither objective nor fair.”

Investors could do well keeping in mind that markets are more likely to price in trade tensions than they are to price in even a low probability of a conflict.

Markets price in conflicts only after they have started, sometimes not even then. Trade problems are more readily priced in risk.

Besides all that, the value of so-called cryptocurrencies fell on Monday and, continued to do so so far today after the People’s Bank of China’s (PBOC) has decided to block “initial coin offerings (ICO)” that is a fund-raising mechanism in China.

This illustrates why few credible economists consider crypto-currencies to be currencies.

Cryptocurrencies fail the two defining characteristics of a currency.

A currency should be:

  • a medium of exchange.
  • a store of value.

Never forget, currencies have no intrinsic value except perhaps under specific circumstances. They are only worth what other people want to give for them.

Cryptocurrencies are not widely accepted and they are generally not accepted at all for the most common transactions on the planet like the paying of taxes to governments.

The volatility of cryptocurrencies is high as now seen with bitcoin that is down almost 20 percent after it hit a record high of $4,980 on Saturday.

One should not overlook the fact that cryptocurrencies are at risk for being treated as assets rather than as currencies for tax purposes, which rather undermines their store of value.

Today, we got a series of Purchasing Managers Indices of Business Confidence (PMI). Please take care, these are all opinion polls and are not based on hard economic data.

The Caixin China General Services Business Activity Index rose 1.2 points from July to 52.7 in August. The Composite Output Index increased 0.5 points from July to 52.4, the highest reading since February. The recovery in both manufacturing and services has led the economic outlook to continue to improve.

Today we also got the IHS Markit Eurozone Composite PMI, which Includes the Eurozone Services PMI. Overall, growth remained firm and moderated only slightly from the rapid pace we’ve seen in the spring. All indicates we could see another strong GDP number in Q3, at, according to the surveys, consistent with 0.6 percent growth, which points to a GDP rise by 2.1 percent in 2017, if all stays more or less where it is today.

The global economy is doing fine, the solid level of growth that as being reported has little if anything to do with the gyrations of the Purchasing Managers opinion polls. The correlation of the Purchasing Managers Indices to economic reality has been steadily weakening.

In the U.S. today we’ll get final durable goods orders data with associated proxies for investment spending. As the U.S. labor markets tighten, the question is if companies are willing to substitute capital for labor or indeed is there is an avert attempt to bring production back to the U.S. where companies substitute domestic capital for oversees labor.

Finally, today, we’ll get Fed speakers with Federal Reserve Governor Lael Brainard, Minneapolis Fed President Neel Kashkari and Dallas Fed President Robert Kaplan with considerable anticipation that the September FOMC will be announcing a tightening of the Fed’s quantitative policy.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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The United States seems becoming rather angry with North Korea. Not “fire and fury” perhaps, but darker days could be on their way.
investors, north, korea, crisis, trump
Tuesday, 05 September 2017 07:54 AM
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