Why North Korean Sanctions Are Good News for Australia

In today’s Money Morning…why ‘fake news’ is nothing new…shifting alliances, and how they affect your investments…an advantage for Australia…and more…

It was a case of ‘UN 1, “un” 0’ over the weekend as the UN Security Council voted unanimously for further sanctions on North Korea.

How did North Korea’s leader Kim Jong-un take it?

Not well, judging from news in the last few days…

What’s more, Donald Trump promised today to unleash ‘fire and fury’ in response to North Korea’s reaction to the sanctions.

Behind all this tough rhetoric, I feel there is a bigger game playing out. And North Korea is just a pawn in it.

The outcome will be very important for Australian investors.

I’ll get back to that in a moment…

But first, let’s look at Trump versus Kim Jong-un…

Whenever I think of Kim Jong-un, I always envision him as a bit of a James Bond villain.

When they show him on TV attending the latest missile launch, I half expect to see him sitting there stroking a cat, berating quaking henchmen.

But the West now has its own unpredictable leader in Donald Trump. At least that’s how both are portrayed in the media.

But maybe it’s just propaganda influencing my thoughts.

We do live in an era of fake news after all.

The media’s portrayal of Kim Jong-un as a caricature villain might be true…but is it an exaggeration?

Fake news is part and parcel of politics. Though there are exceptions.

And, to be clear, Western media is still well above average in global terms.

I remember, during the first Iraq War, an unfortunate Iraqi general on TV saying how Saddam Hussein’s army was obliterating the US army. Right as US tanks rolled into Baghdad in the background…

But don’t make the mistake of believing that this sort of activity doesn’t take place in Australia. All sides of politics use media to influence public opinion for their benefit.

It’s always been like this…

The real news is that ‘fake news’ is actually nothing new at all. It’s just taken Donald Trump to soundbite it.

So, when I hear news over the weekend that the UN has imposed sanctions on North Korea, I don’t say, ‘Yeah, take that Kim Jong-un!’…or think, ‘Oh, that makes us safer.’

Do you think the US, a country that spends more on weapons than the next eight countries combined, is genuinely scared of a two-bit socialist dictatorship?

No, you have to look beyond that.

As an investor, doing this will help you separate fact from fiction.

And, as an investor, your main goal should be to get good facts. Not alternative facts. Not biased facts. And not exaggerated facts.

When you look at the North Korean situation this way, the vote to impose sanctions becomes important. But it’s not because Kim Jong-un is a madman that needs to be reined in.

In fact, it’s especially important for those with an interest in China’s growth.

Let me explain…

Lessons from 1984

You might have read 1984 before, the classic dystopian book by George Orwell.

In it, the main tools of power used by the ruling party were propaganda and perpetual war.

The three superpowers in 1984 are Oceania, Eastasia and Eurasia. They are always at war with each other. But the alliances change.

Sometimes, ‘we’ are at war with Eastasia, and at other times Eastasia has ‘always been our friend’, with Oceania now the enemy.

I think a similar three-way global power game is currently playing out.

It’s between the US, China and Russia.

The alliances are just as flimsy and changeable as in Orwell’s tome.

Forget about Europe. It’s a disjointed power and looks to be in the process of failing politically. Though this might take years or decades to complete.

No, the real jostle for power is between the two Cold War superpowers — the US and Russia — and the emerging Asian superpower, China.

Initially, Trump’s presidency seemed to indicate a new move towards a Russia-US alliance, with China as the outsider.

Trump has talked of tariffs, currency manipulation responses and military moves to counter China’s growth in the region.

But there is clearly a part of Washington that doesn’t want to go in this direction. This other group prefers to have a US-China alliance boxing in Russian interests.

This is the real battle.

Good for Australia

Australia’s interests lie very much in that second approach. Our competitive advantage is in materials, mining and agriculture — all crucial to Chinese economic growth.

At the same time, we are growing trade in services like tourism, as the chart below shows:

Source: ABS, HSBC
[Click to enlarge]

The next 10 years could be a sweet spot of economic development for Australia if Chinese growth continues.

On the other hand, a US-Russia alliance that freezes out China doesn’t offer many economic benefits to Australia.

Which is why Friday’s vote on sanctions on North Korea was good news for us.

It indicated an easing of tensions between the US and China.

Their diplomats were working together for a month on the draft text of the resolution. The US publicly thanked the Chinese for their key support.

In the same week, Trump reluctantly signed a sanctions bill on Russia for meddling in the US election.

He clearly didn’t want to do this, but he had no choice.

We will see how it all plays out.

There will be many moves and counter-moves to come.

I believe the North Korean situation is a proxy battle from the perspective of US strategic interests; it’s not a major military threat as some would have us believe.

Seen this way, Australian investors should be happy with the weekend’s developments. Let’s see how it unfolds in the weeks and months to come…

Good investing,

Ryan Dinse,
Editor, Money Morning

PS: US–China relations are important for Australia’s miners. If you’re following this story, you should be investigating opportunities in the resources sector. My colleague Jason Stevenson thinks he has found a resources stock that is set to rocket before 30 August. All the details here.

Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle.

Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.

Ryan's premium publications include:

Money Morning Australia