There Could Be a Nobel Peace Prize in North Korea Situation for ... Somebody

 | Aug 16, 2017 | 3:26 PM EDT
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ITA

,

dfen

In last week's column, "Trump's North Korea Stance Signals a New Arms Race Is at Hand," I discussed the implications of a shift in philosophy away from appeasement and toward confrontation as a means to prevent war, specifically with respect to North Korea but also more broadly concerning all kinds of international engagement. 

Since then, the situation in North Korea has at least temporarily been diffused, logically because of the hardline rhetoric coming from Trump and his administration leadership. 

This return to a "peace through strength" approach to military preparedness harks back to the Reagan administration's "strategic defense initiative" (SDI), which was referred to by the media as "Star Wars" and was characterized by a military spending competition with the Soviet Union. 

Although North Korea does not present the direct military risks to the U.S. that the USSR did, it still presents the risk of being the catalyst that draws the rest of the world into war that caused the armistice along the 38th Parallel to be chosen instead.

As such, I think it's more likely than not that Trump's hardline approach with the North Koreans will be adopted as the new U.S. policy and that it will be followed by necessity with increased spending on defense, which will obligate the rest of the world, at least China and Russia, to do the same. 

This should prove to be very beneficial for the businesses and stock prices of the government contractors referenced in last week's column, just as it was during the Reagan administration.

Rather than investing in each of the major U.S. government contractors individually, two options allowing for investing in most of them are the iShares U.S. Aerospace & Defense ETF  (ITA) and the Direxion Daily Aerospace & Defense Bull 3X Shares ETF  (DFEN) .

Of the two, ITA is larger, more established and has a lower expense ratio, at 0.44% annually. DFEN only started last May, is still very small and has an expense ratio of 1.09%. 

DFEN, however, employs a triple leveraging and is easy to understand. Rather than leveraging through esoteric non-liquid vehicles, which is prevalent with many leveraged ETFs nowadays, they simply borrow money to make additional purchases. 

The Reagan policies ultimately contributed greatly to the economic collapse of the Soviet Union, as it couldn't meet the spending required, which also caused the disbanding of the union in 1991. 

Prior to that, though, realizing the trajectory for such was likely unstoppable, the Soviet Union's then-President Mikhail Gorbachev began pursuing a strategy of peace through capitulation and disarmament, for which he was awarded the Nobel Peace Prize in 1990, before the USSR actually disbanded. 

North Korea is the last remaining vestige of a world order that no longer exists. It's likely that the current discord is evidence of that situation approaching its end and the demise of the Kim regime in North Korea. 

If Kim Jong Un follows a peaceful path, as Gorbachev did, he might win be awarded the Nobel Peace Prize as well. If the Kim regime is brought to a conclusion some other way, however, it's very possible that Donald Trump will be awarded the prize.

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