The investor concerns I hear when I’m meeting with and talking to clients every day tend to run in trends. One of the most frequent conversations I’m having right now is, “What about North Korea?”
Obviously North Korea has occupied a high-profile spot on the world stage as this peculiar little nation has continued to develop its ballistic missile and nuclear weapons capabilities. I quite frankly know more about North Korean President Kim Jong-Un than I ever wanted to know. And with the strange Trump tweets and bizarre provocative rhetoric coming out of North Korea, it’s like watching a senseless, awful movie that you just can’t seem to turn away from (aka Will Farrell’s "Land of the Lost").
From an economic point of view North Korea itself is less than inconsequential. What I think the true concern of investors centers around is the U.S. relationship with China and how erosion in this important trading affiliation may impact markets around the globe.
As we all know, China is North Korea’s enabling benefactor state, as both nations share a border and the government of each nation shares a core political philosophy. President Trump is determined to enlist the Chinese to create accountability and pressure on North Korea to end their weapons development.
Both the President and the Chinese government say publicly they would like a peaceful resolution to the threat represented by North Korea’s weapons programs, but having watched President Trump's actions in office, and having read him and watched him for years before hand, I feel confident he is enlisting aggressive non-public tactics to get his way as well.
Which is why I wasn’t surprised to see the news on Wednesday that the Chinese were hinting at no longer buying U.S. government bonds. While the rumor centered on the Chinese indicating U.S. bonds were no longer attractive from an investment point of view, I presumed this to be more likely a reaction to some intense behind the scenes Trump rhetoric.
The rumor was enough for the stock market to open lower, although it did recover throughout the day. I know among the investors I often talk to there is a strong perception that the U.S. government owes China so much money that it's “tied our hands” in getting tough with the Chinese.
My perception is otherwise. According to information on Bloomberg, at the end of 2017 the Chinese owned about $1.1 trillion of U.S. government debt, which accounted for about 6 percent of all U.S. Treasury debt and about 8 percent of publicly held debt (most U.S. debt is owed to the government itself or U.S. financial institutions).
While the amount of U.S. debt owned by the Chinese is not inconsequential, it’s hardly enough to serve as a bargaining chip of any sort. Besides, it’s fairly difficult and complicated to use debt as coercive measure. U.S. Treasury bonds function in the manner they are issued, and can’t just be “cashed in.”
Sure, China could sell these bonds, potentially sinking the Treasury bond market and driving interest rates higher temporarily, but U.S. Treasury bonds trade in a huge market, which is liquid enough to likely absorb these bond sales in fairly short order, and the only party likely to be hurt by such a maneuver would be the Chinese themselves as they sold holdings for unattractive prices. I doubt we would even notice much as Main Street investors.
So, do I worry about North Korea from an investment perspective? Not for one second. I have no greater insight than anyone else on this matter, but I do predict that this matter will be resolved peacefully, and if it does go the unfortunate route of requiring U.S. military action, I’ll be banking on a quick resolution there as well.
I’ll be hard pressed not to buy, if the market gives me an opportunity related to this issue.