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Sept 2017 : Perceptions & Analysis

Garry Wong

September 06, 2017
insurance Investment Current Affairs Trump North Korea game theory


Do you see a Woman’s body or 2 Dancers from the picture?

There are always multiple ways to look at a situation; we will see what we want to see.

Similarly 2 on-going events are looking to shape the market in the upcoming weeks ahead. Opportunities lies in times of crisis.

 

 

1.) President Trump has promised “Fire and Fury” to North Korea’s nuclear provocation. Scenario 1A: War is Declared by the US.

All hell break lose, markets will plunge overnight.

Probability - Low.

If US initiates the first strike, China would come to North Korea’s defense. Further, Seoul, the capital city of Republic of Korea (ROK or South Korea), would be under threat of massive artillery shelling from Democratic People’s Republic of Korea (DPRK or North Korea). Both US and N.Korea has too much to lose by initiating military action.

 

 

Scenario 1B: The paper tiger is exposed (On both sides)

Further Sanctions might be imposed. The usual condemnations take place, and business as usual. No doubt N.Korea will want to create further provocations in order to gain concessions, but it will remain status quo otherwise.

**Probability - Very High. **

Scenario 1C: North Korea initiates military action

China would not come to their aid if counter-attacked. The N.Korean leadership does not care about her people, but their positions will not be protected in this scenario. Destroying S.Korea or Japan does not accomplish anything. There is nothing to be gained, and everything to lose.

**Probability - Very Low, practically 0. **

The leadership in North Korea has been doing everything that it can to preserve its power. It is not wrong to think that pursuing Nuclear Arsenal will put it on an equal footing with Global Powers. This follows the assumptions under MAD - Mutual Assured Destruction, derived through Game Theory. It is a very stable Nash Equilibrium. It remains to be seen if the existing World Powers are open to accepting a rogue Nuclear State.

 

 

2.) US Debt Ceiling is due on 29 September 2017 and President Trump has threatened to Veto all bills to raise the debt ceiling if his project wall along the borders of Mexico is not approved.

In summary, the US Govt will have to undergo a shutdown due to lack of funds. This is happened in 2013 after the US congress failed to come to an agreement on the Affordable Healthcare Act (aka ObamaCare) It resulted in overnight market plunges, but it recovered subsequently after the bill was passed.

Scenario 2A: Bill is passed prior to the deadline. Probability - Low

Scenario 2B: Bill is after deadline. Probability - High

Scenario 2C: Bill is never passed. Probability - Very Low, practically 0

Scenario 2D: Bill will be passed on the day itself. Probability - High

President Trump is a business man, he would push his limits to test the congress. Hence 2A is unlikely. 2C is also unlikely because there will be a revolution or vote of no confidence for him. One simply does not threaten the livelihood of a Nation to push his own Agenda.

For both Event (1) and (2), the assumption made is that all players involved are rational and logical people.

Given these information, would you choose to respond or react? What would be the most appropriate actions?

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