Stay Cool

Hey team,

So, ah, this happened last night.

That’s right, I’m not even going to tell you. This time I’m making you click on the link.

So what does it mean? Well, it all depends on how seriously investors take it. To date, whenever there has been this kind of provocation, the response has been somewhat muted. This tells you that by and large, investors think that there will be a diplomatic solution to this. But what if they are wrong? What if The Don strikes back? What if South Korea does? What if it turns into all-out war?

A Normal Response
In the short term, following either a nuclear test or a missile launch by these guys, you tend to see a bunch of the more risky kind of investments fall in value and a bunch of the safer investments go up. For example:

These things tend to go up:

  • Gold: Investors think that gold is a “safe haven” asset.  Basically it’s a place to put your money when you are afraid that things are about get really, really bad. To be honest, it’s not something I fully understand, but I think it’s because governments the world over hoard this stuff by the truck load. Think Fort Knox in the United States. So the idea being, that should the world implode, and everything else falls to sh*t, governments will be happy to exchange your gold in return for, well, stuff? Maybe? Honestly I don’t get it. But that’s what happens. When investors get nervous, they sell out of risky investments and put some of it into gold.
  • United States Treasuries: Rightfully or wrongfully, investors believe that the US Government is safest government in the world to lend money to. And US Treasuries are basically the way you do that. US Treasuries are effectively I.O.U’s issued by the United States government to investors. Investors lend the government money and in return the government will pay them an interest rate for doing so. The thing is, these IOU’s can be bought and sold in the market by investors, which means the value of these IOU’s can go up and down. And when something like a missile test happens, investors get nervous sell out of risky investments and put some their proceeds into US Treasuries. And given demand has goes up for them, so too does the price. For what it’s worth the US Treasury market is a freaking massive market. About 15 trillion dollars big.

And these things tend to go down:

  • Sharemarkets, particulary South Korea’s one: Why? Because there is more uncertainty in the world. Think of every investment as a kind of “bet” or gamble, which pays you specific odds. In general, the shorter the odds of a bet, the more money you are likely going to be willing to gamble on it. The longer the odds, the less money you are. Well, when a missle strike happens, it increases the chance of a war breaking out. It doesn’t mean that a war will break out, but the likelihood of it happening has increased. This in turn alters, or widens the “odds” for your bet in the stock market. Given this, investors reduce their bets and move their money to safer, shorter priced odds (like Gold and US Treasuries). So as money leaves the stock market, ie demand falls, so too do prices.

The size of these moves are all dependant on how likely investors think the chances are of the situation escalating. The thing is, this is the 20th missile test they’ve done this year. And so far, so good. Donnies kept his finger off the button, South Korea’s left their troops at bay and Lil Kim continues to prove his antiquated miliarty are far from useful. So with each launch, the resposne in financial markets become more and more subdued.

Eventually though, something got to give. South Korea a big players in the world market and account for over 2% of everything bought and sold in the world. For what it’s worth, during the Korean War in the 50’s, 1.2 million South Koreans died and the value of thier economy fell by 80%.

Fingers crossed everyone stays cool.

Anyway, that’s 5 minutes. Hope it helped. 

Categories: General Finance, Investing, Markets

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