The VIX has been low and boring since the November election.  But, it suddenly spiked almost 50% last week — actually in just two days — before declining somewhat by closing on Friday.  Obviously, this increased volatility (fear) was a result of fear over Korea.

I recall reading an econometric analysis a few years ago predicting the stock market would decline 10-15% with an outbreak of war on the Korean Peninsula, before beginning the inevitable recovery.  That analysis, as I recall, assumed it would be a conventional war with South Korea doing most of the fighting.  It dismissed any analysis of a nuclear event, because there is so little economic data following nuclear events.  That is truly unknown territory.

What is interesting to me is the willingness of other nations to get involved.  It is reminiscent of two bellicose spoiled-brats on the playground  — bumping chests, with more ego than brains.  Eventually, the adults show up to de-escalate the situation.  In this case, China and Russia showed up and are actually being constructive.  It is clear that China has much to lose, but Russia’s involvement is less understandable.  It is certain that other nations are working in the background.  It is rumored that even Germany’s Merkel is working hard behind-the-scenes.  She is an adult and not trigger-happy!

I remember that Hitler decided to begin World War II when Germany was cut off by the bond market.  That meant that Germany could no longer borrow money to make their military stronger.  When his military reached maximum strength, he invaded Poland.  Assuming they are enforced, the latest sanctions against North Korea approved by the U.N. Security Council will begin a slow strangulation of that country, until Kim Jung Un feels his military strength will begin to wane.  Why wouldn’t he launch a war at that point?

My expectation is that the spoiled-brats will be separated at this point, but that a future war is inevitable.