A Message from the CEO

This Tide Will Turn

BY Peter Grosskopf

The big story of 2019 for financial markets turned out to be the melt-up in U.S. equities. This big wave has not only floated broad equity averages to fresh all-time highs but has also extended the length of this bull market to the longest on record.
Market surfers cite favorable conditions such as decent economic strength, supportive interest rates and a central bank pivot back towards easing as powering excellent runs by equity all-stars (from FAANG stocks1 to financials).
Traditional riptides, such as widening credit spreads and surging default rates, are nowhere to be found. (Pardon the surfing analogies, but I am heading to find waves in Costa Rica with my family for the holidays.)
Without question, favorable central bank trade winds (as opposed to Trump trade headwinds) fostered awesome conditions in traditional asset markets this year. Not only did global central bankers orchestrate a 180-degree directional flip during the spring, but the Federal Reserve has now abandoned balance sheet runoff in favor of its fastest balance sheet expansion of the QE (quantitative easing) era. The requisite attendant money supply growth is shown in Figure 1.

We caution our clients that 2019's uniquely favorable conditions are unlikely to be sustainable, especially at the margin. Shifting fundamentals are creeping into the forecast and are likely to create more ominous wave sets.

Speaking from the perspective of Sprott’s precious metals franchise, gold performed extremely well in the face of this year’s market jubilee, which transpired amid supportive conditions including a stable U.S. dollar and benign inflation. (As of this writing, gold bullion was up nearly 16% through last Friday's close.)
For twilight surfers, however, we believe gold’s lifeguard role has never been more important.
Monetary Policy Update
In capturing the stunning about-face of Federal Reserve policy in recent quarters, I reference the narrative of former Sprott colleague Trey Reik (now of Bristol Gold Group).
    • “In perhaps the most widely telegraphed policy action in its history, the Fed just spent 23 months…running its balance sheet down some $750 billion…”
    • After declaring in December 2018 that its balance sheet runoff was “on autopilot, working well, and not subject to review,” Chair Powell abruptly reversed direction and shuttered the program completely in August 2019.
    • Now, in the 10 weeks since 8/28, the Fed has expanded its balance sheet by a mind-numbing $283 billion, or an annual rate of $1.5 trillion.
    • Further, the Fed's proposed schedule of Treasury bill POMO's2 will tack another $510 billion on the Fed's balance sheet by June 2020, returning its size to its prior all-time high of $4.5 trillion!"
As shown in Figure 1, the Fed’s two years of vastly over-promoted balance sheet runoff unwound a paltry 20% of aggregate QE asset purchases before not only being halted, but then being reversed into incremental asset purchases at an even steeper slope. 
In our view, gold has clearly called the central printer’s bluff.
Figure 1. U.S. Fed Balance Sheet ($Billion) vs. Spot Gold Price (Top) / Weekly Change ($Billion) in Fed Balance Sheet (Bottom)
U.S. Fed Balance Sheet vs. Gold Price
Source: Sharelynx. 
Our contribution to the debate as to whether recent Fed balance sheet growth, and underpinning of the repo market, qualify as “QE” would be a heartfelt, “Who cares what you call it!”
The relevant point is that the Fed’s balance sheet can now never decline without causing widespread stress.
Regardless of what Chairman Powell seeks to label it, 2019 markets have been hugely pumped by the Fed and global central bank money-printing binge. And still, Trump wants more “of that money”!

Yes sir, the Fed Put makes for good big wave surfing! This environment is nirvana for gold.

Debt and Deficit Levels are Out of Control

Our investment thesis for gold rests on our belief that global debt levels have reached the “point of no return.”
Whether one uses the broad lenses of global, emerging or developed economies or a narrower focus on G7 countries, the message is identical.
Debt levels have become so onerous that they can only be serviced in the context of always accelerating rates of fresh credit creation — i.e., more debt to service existing debt.
Nothing summarizes the debt conundrum of developed economies more than the 2019 pivot of global central banks back towards easing posture.
As shown in Figure 2, the U.S. Fed, the European Central Bank (ECB) and the Bank of Japan (BOJ) have engaged in a giant tag-team of global debt monetization for the past 13 years.
The precipitous Q4 2018 swoon in the S&P 500 Index3 reminded global central bankers in stark terms that global liquidity can never be withdrawn without immediate damage to the reigning prices of global financial assets.
Figure 2. Total Assets of Major Central Bank Balance Sheets (2007-11/2019)
Major Central Banks: Total Assets
*Total of Fed, ECB and BOJ. Source: Haver Analytics.
In short, with this much debt in the system, global central banks are painfully aware that, from a balance sheet perspective, the only two possibilities to recalibrate debt levels back towards productive underlying output are default or debasement — and central bankers will always do everything in their power to avoid debt deflation. Gold’s unique portfolio utility is that it is possibly the only investment asset that can provide protection in both scenarios.
From an income statement perspective, it is equally concerning that global sovereigns display little capacity to service and eventually pay down their debts. Current tax rates, which are close enough to being maxed-out are not going to procure cash flow increases at the margin.
Studies have shown that tax increases from contemporary levels generally diminish government receipts, and tax-targeting the ultra-rich becomes ineffective due to the global mobility of extreme wealth.
Unfavorable demographics further complicate global debt loads, generating severe stress on entitlements and increasingly unfunded future obligations. Economies, in general, are not growing fast enough to outpace debt growth and are falling far behind in their ability to do so.
As shown in Figure 3, we believe gold is increasingly sensitive to the unraveling fiscal situation in the United States.
Figure 3. Spot Gold Price (Inverted) vs. Trailing 12-Month Federal Budget Deficit (2012-11/2019)
U.S. Budget Deficit vs. Gold Price
Source: Meridian Macro.
Logic and mathematics suggest that government deficits in developed countries can only increase in future periods.
Debt service consumes a growing percentage of government cash flows in developed countries and there is likely to be increasing pressure from the funding of the populist promises now winning elections worldwide.
The combination of these funding requirements cannot naturally be absorbed by government bond markets without central bank support, leading to a vicious cycle involving yet more money printing.
We are always amazed that investor consensus ever concludes that interest rates can rise. As shown in Figure 4, the Fed’s 2018 rate hikes were vaulting federal interest payments much higher even with a historically low basis.
Figure 4. Federal Interest Payments on Outstanding Debt ($Billion SAAR; Seasonally Adjusted Annual Rate) vs. Federal Funds Rate (1993-11/2019)
Federal Interest Payments on DebtSource: Meridian Macro.
Shame on today's and yesterday’s political parties and their supporters for leaving this mess to be solved by our future generations.
Should we worry? Perhaps not until the bubble bursts, but we can get prepared.
Preparing for the Next Decade
We are of the view that the greatest consensus realization of the next decade will be the recognition that global sovereign debt can never be paid off or, for that matter, even reduced. The gorilla in the room henceforth will always be debt service. Future debt service depends a great deal on the re-emergence of inflation, which in turn will drive debasement and the financial repression of savers.
Since central planners and political parties will do everything in their power to foster and mislabel required inflation, it will be critical for investors to remain on high alert in order to independently measure inflation’s impact on their investment portfolios. Those looking for consumer price index (CPI)-type inflation are looking in the wrong place. Asset-price inflation is alive and well, and is already crushing portfolio purchasing power around the globe.
Also, front and center on government agendas will be concepts related to printing money without legitimate accounting, such as helicopter money, basic minimum income and MMT (Modern Monetary Theory). These economic blasphemies may seem to bolster real economies into fake economies, by helping create inflation and sustain debt levels, temporarily, until it becomes obvious that this is the equivalent of a financial drug binge — it feels good at first, but may eventually kill you.
In a nutshell, these ideas fly in the face of rational economic theory and will invariably lead to runaway inflation. They are, however, coming to a theater near you. 
In this environment, the "don't fight the Fed" strategy may continue to deliver results. Maintaining a reasonable weighting to solid, cash flow producing equities seems to us like it has a decent chance of keeping pace with inflation.
Treasury bonds, on the other hand, are a tougher call. While they would work in a recession, they also have tremendous downside in the event of a "blow-off" of the current debt bubble.
We at Sprott handicap the chance of an economic slowdown as high in the next few years but would advise our clients to tread cautiously with fixed income and avoid duration.
Real estate and other alternative real assets may, due to their high degree of leverage, be more sensitive to cap rates than revenues and are therefore likewise susceptible to correction.
Threats on the Horizon
Of course, the bigger this bubble gets, the worse the inevitable blow-off becomes.
Our list of threatening potentialities only continues to swell:
  • Normalization of rates, after extensive free money experiments have inflated financial assets, threatens valuation levels across-the-board;
  • Relentlessly rising deficits and debt levels (especially at deceivingly low interest rates);
  • Record entitlement and health care funding gaps;
  • increasingly insolvent state and local governments and pension funds in the U.S. will ultimately require bailouts;
  • A massive Chinese debt bubble which is keeping the lid on the renminbi — setting up a boomerang effect countering any positive trade gains;
  • Emerging market economies hamstrung by U.S. dollar-denominated debt;
  • Wealth gaps are their widest in the last century and are causing populist political results.

No Portfolio is Complete without Gold

In short, we believe that latent systemic risks have never been more troublesome. Call us paranoid, but we are in Ray Dalio’s boat in believing that we are nearing a paradigm shift where that easing of monetary policy by central banks "can't continue."

At Sprott, our recommendation remains that no portfolio is complete without a prudent allocation to gold. We agree with Jim Grant’s timeless observation that the gold price, most simply, is the reciprocal of global confidence in central banking.

Once a few rogue waves wash into the equation, and the asset-surfing public recognizes our government lifeguards are drinking their own spiked Kool-Aid, "Surf's Up" may not sound so compelling. Or, should confidence in the waves be shattered by one or more significant accidents, the rush into the gold market will become a tsunami. Either way now is no time to surf without some gold.

Happy and healthy holidays to all. Pura Vida!

Peter Grosskopf, Chief Executive Officer, Sprott Inc.;  Managing Director, Sprott Resource Lending

2019: the year of street protest

Mass demonstrations around the globe show no sign of fizzling out

Gideon Rachman

Efi Chalikopoulou illustration for web

Certain years in history — 1848, 1917, 1968, 1989 — conjure up images of street protests, mass demonstrations and revolutionary turmoil. When historians put 2019 in perspective, they may also declare it a vintage year for popular unrest.

In terms of sheer geographical spread, it is hard to think of a year to rival this one. Protests large enough to disrupt daily life and cause panic in government have broken out in Hong Kong, India, Chile, Bolivia, Ecuador, Colombia, Spain, France, the Czech Republic, Russia, Malta, Algeria, Iraq, Iran, Lebanon and Sudan — and that list is not comprehensive.

Yet all this turbulence has so far defied efforts to come up with a convincing global explanation.

One reason for the lack of analysis is that the 2019 rebellions have taken place in such disparate places — in wealthy global cities like Hong Kong and Barcelona, as well as poor and relatively isolated nations such as Sudan and Venezuela.

That makes it harder to join the dots and easier to cast doubt on the idea that there is anything global happening. There has also been no single iconic moment — no fall of the Berlin Wall or storming of the Winter Palace to capture the drama. But while the 2019 revolts have not yet toppled a major world leader or government, they have certainly claimed some scalps. Street protests and strikes saw Evo Morales, the president of Bolivia, forced from office in November, after 13 years in power.

Other political leaders felled by mass demonstrations include Abdelaziz Bouteflika of Algeria and Omar al-Bashir of Sudan — both of whom fell in April after decades in power. (In the case of Mr al-Bashir, the military staged a coup, after months of protests.) The prime minister of Lebanon, Saad al-Hariri, was forced from office at the end of October after two weeks of mass protests. The following month, Adel Abdul Mahdi, the prime minister of Iraq also resigned, after several months of turmoil. In both Iran and Iraq, mass demonstrations have been met with shocking levels of violence — with hundreds killed on the streets of both countries.

The fact that several countries in north Africa and the Middle East have been convulsed by demonstrations, often at the same time, shows that there are indeed connections between popular upheavals in different countries. In two regions — the Middle East and Latin America — the protests are sufficiently widespread to constitute a genuine regional upheaval, in which events in one country are clearly inspiring emulation in neighbours, in a manner reminiscent of the Arab Spring.

The slogan made famous back then — “the people want the fall of the regime” — is once again being chanted.

A common language in Latin America has also allowed news and images of unrest to spill easily across borders.

In today’s connected world, ideas and slogans can even jump continents effortlessly — spread by smartphone.

Some Catalan protesters have been seen carrying the flag of Hong Kong and have adopted similar tactics — such as occupying an airport.

The spark for mass demonstrations has varied from country to country. In some places, it was an economic trigger — such as a rise in metro fares in Chile or a proposed tax on WhatsApp in Lebanon.

In other places, the motive has been more clearly political — such as the new laws on citizenship and refugees in India, or a proposed extradition law in Hong Kong.

There are also certain common themes and tactics that emerge in location after location: protests at the harshness of everyday life; disgust at corruption and oligarchy; accusations that the country’s political and economic elite are out-of-touch and unresponsive.

Social media is a powerful organising tool everywhere — allowing protesters to crowdsource grievances, slogans and tactics. In an effort to prevent protests going viral through social media, India has shut down mobile communications in some of the cities affected by mass unrest.

But while large demonstrations are clearly more easily conjured up by social media, this new brand of “leaderless” revolt may also suffer from its spontaneity. Hashtags and internet memes are good at getting people on to the streets quickly — but they can disguise a lack of organisation and strategy.

Perhaps as a result, relatively few of the demonstrations have so far succeeded in toppling leaders — some that did succeed, such as those in Algeria, have continued even after a nominal change in government. But the mass protests of 2019 show few signs of dying out.

Indeed, as the year comes to end, they may be gathering force — with huge demonstrations, challenging the Indian government.

The Modi administration’s response has been clumsy and violent — with prominent intellectuals arrested in front of television cameras and the police using brutal tactics against students.

All of that could easily fuel a spiral in unrest in India in the new year.

The Hong Kong protests also look set to rumble on, while confrontation in Spain and Chile could also intensify.

Above all, as the last 12 months have demonstrated, social unrest is now repeatedly breaking out in unexpected places, for unanticipated reasons.

So while 2019 already qualifies for a place in the annals of street protest, it is possible that the really world-shaking year may turn out to be 2020.

The Post-American Middle East

The Trump administration is learning that pulling back from the Middle East is neither easy nor without risks and costs. What is needed is clear: greater US readiness to use limited military force, if necessary, and a willingness to pair sanctions with diplomacy.

Richard N. Haass

haass108_DELIL SOULEIMANAFP via Getty Images_USflagsoldiersyria

NEW YORK – It was August 5, 1990, just days after Saddam Hussein’s Iraq had invaded and conquered all of Kuwait, and US President George H.W. Bush could not have been clearer as he spoke from the South Lawn at the White House: “This will not stand, this aggression against Kuwait.”

Over the next six months, Bush proved to be a man of his word, as the United States sent a half-million soldiers to the Middle East and led an international coalition that liberated Kuwait.

Three decades later, a very different American president embraced a very different US policy. In the wake of abandoning its Kurdish partners in Syria who had fought valiantly in defeating Islamic State (ISIS) terrorists, the US stood by as Iranian drones and missiles attacked Saudi Arabian oil installations, temporarily taking half of its capacity offline.

Welcome to the post-American Middle East. To be fair, the phrase is something of an exaggeration, as the US has not withdrawn from the region. In fact, it has recently sent additional troops to deter and, if necessary, help defend Saudi Arabia from future Iranian attacks and possibly respond directly to them. But there is no getting around the fundamental truth that the US has reduced both its presence and role in a region that it has dominated for nearly a half-century.

The roots of this trend date back to President George W. Bush, whose decision to launch an ill-advised and poorly designed war of choice against Iraq proved to be a turning point in US foreign policy.

The high costs and poor results of that war turned the American public against military involvement in the region, which influenced President Barack Obama as he chose not to follow through on his warnings to Syria’s government that use of chemical weapons would cross a “red line” and trigger grave consequences.

Obama also decided not to follow up the NATO-led intervention in Libya that removed Muammar al-Qaddafi’s regime but left behind a divided country and a failed state.

President Donald Trump shares this aversion to military involvement in the region. In addition, increased domestic production of oil and gas has diminished the direct importance of the Middle East to the US. Moreover, renewed great power rivalry has increased the need for the US to shift resources and attention to Europe to counter Russia, and to Asia to offset China.

The Trump administration has distanced itself from the Middle East in myriad ways beyond demonstrating a reluctance to use military force or station soldiers in conflict zones. Diplomacy is largely absent. Trump has chosen to ignore human-rights violations in Saudi Arabia and Egypt, and his administration has not made any serious effort to resolve the Israeli-Palestinian conflicto.

The greatest source of uncertainty in the region involves Iran. The Trump administration unilaterally withdrew from the 2015 nuclear agreement, despite Iran’s compliance with it. The administration then introduced a policy of “maximum pressure,” consisting mainly of severe economic sanctions, which are having a demonstrable impact on Iran’s economy – by some estimates causing its GDP to shrink by nearly 10% this past year.

But if the impact of the sanctions is apparent, their purpose is not. What is clear is that Iran will respond to America’s economic warfare with warfare of its own. In addition to Saudi oil installations, Iran has already attacked tanker traffic moving through the region, and is gradually breaking out of the constraints set by the 2015 nuclear deal. As the economic pressure on the regime intensifies, the US and its allies should expect additional Iranian responses.

This presents the Trump administration with a dilemma. Its unstated but apparent preference is for regime change in Tehran, but 40 years after the Iranian revolution, the regime remains resilient, despite public protests. Responding militarily to Iranian actions could lead to just the sort of conflict Trump does not want in the run-up to the 2020 US presidential election. But allowing Iran to free itself from the limits of the 2015 nuclear accord increases the odds that Israel will attack Iran, dragging the US into war.

And even if that does not happen, US inaction might lead one or more of Iran’s neighbors to acquire nuclear weapons to balance Iranian capabilities and the possibility that the US withdraws further from the region. Such a development in what is already the world’s most unstable region would be a nightmare.

The best way forward would be for the US to articulate what policy changes it wants from Iran regarding its nuclear and missile programs, as well as its behavior throughout the region, and what it is prepared to offer in return. Such a policy should be announced in public, thereby forcing the regime to explain to its frustrated citizens why it is turning down much-desired sanctions relief in order to continue its destabilizing activities in the region and its nuclear and missile programs.

In the face of intense economic and political pressure, the regime just might agree to negotiate, much as it did when it agreed to end its decade-long war with its then-arch-enemy Iraq. Thus far, though, no such US initiative has been forthcoming.

In short, the Trump administration is learning that pulling back from the Middle East is neither easy nor without risks and costs. The US still has a stake in fighting terrorism, resisting nuclear proliferation, supporting the free flow of oil, and promoting the security of Israel and American partners in the Arab world.

What is needed is clear: greater US readiness to use limited military force, if necessary, and a willingness to pair sanctions with diplomacy. What is less clear is whether such a policy mix can be expected any time son.

Richard N. Haass, President of the Council on Foreign Relations, previously served as Director of Policy Planning for the US State Department (2001-2003), and was President George W. Bush's special envoy to Northern Ireland and Coordinator for the Future of Afghanistan. He is the author of A World in Disarray: American Foreign Policy and the Crisis of the Old Order.

North Korea and the Threat of ICBMs

By: George Friedman

Rumors have been swirling that North Korea is about to test an intercontinental ballistic missile.

The source for this latest rumor is U.S. intelligence, though North Korea has been warning it will perform such a test.

North Korea tested three ICBM boosters in 2017.

Those tests didn’t prove mastery of missile reentry capabilities or an effective guidance system, but if North Korea does successfully demonstrate such capabilities for an ICBM, it will change the dynamic between the North and the United States.

Pyongyang has demonstrated its ability to field a nuclear weapon and to successfully test-fire non-intercontinental weapons.

That means that the continental United States is not at risk of a nuclear attack from the North.

But if an ICBM is successfully tested, that means that, regardless of intentions, North Korea has the ability to strike the United States.
That would force the U.S. to rethink its strategy. 

U.S. Strategy

The U.S. has accepted the idea that North Korea has the ability to strike neighboring countries allied with the United States, including Japan and South Korea.

The United States had no strategy for neutralizing the North’s nuclear capability. An attack on nuclear facilities with non-nuclear weapons would have probably eliminated the weapons, but its success would have depended on two things.  

First, that the intelligence the U.S. had on the location of these facilities was completely accurate. Second, that all facilities that needed to be struck were vulnerable to air attack or possibly attack by special operations forces. Some, particularly those housing key facilities and storage, might have been buried deep underground or hardened in some way to render them minimally vulnerable to non-nuclear military action. 

The United States was not prepared to initiate a nuclear attack on North Korea, since it could set a precedent that might turn against American interests. As important, North Korea had developed an alternative strategy that was hard to counter.  

Over the decades, it created a heavy concentration of artillery and rockets well in range of Seoul, which is close to the North Korean border.

A U.S. attack on North Korea would have been countered by a massive artillery attack by the North on Seoul.

And with artillery well dispersed in hardened locations, suppression by air before massive damage and casualties would have been difficult.

The U.S. strategy was to accept the existence of shorter-range nuclear weapons and to engage in negotiations to persuade North Korea to abandon its nuclear arsenal.

These discussions failed for obvious reasons.

North Korea’s strategic goal is regime preservation and territorial integrity. Surrounded by countries that theoretically could have an interest in attacking the North, the development of a nuclear deterrent was essential to its national strategy.

An attempt to intrude on the North was only a theoretical possibility, but the farfetched can turn out to be a real threat, and nations need a deterrent for farfetched options that the other side may suddenly find to be quite reasonable.

What emerged was a fairly stable situation. North Korea could not strike at the U.S. The South Koreans were pleased that Seoul was not at risk under the circumstances.

The Japanese recalculated the risks from the North without a U.S. deterrent but did nothing overt. The option of an American strike remained but was unlikely.    

The option of a North Korean attack on Seoul was even more unlikely.

The U.S. was not going to get Pyongyang to abandon its nuclear capability, but at the same time, Washington was not on a hair trigger to strike the North.

What appeared once to be a near-war situation now seemed contained. This should have been a satisfactory solution for both sides; the North Korean regime was secure and the threat of a nuclear attack on the United States was left off the table.

A Window of Opportunity

This is why the rumors of a North Korean ICBM test seem hard to fathom, as it only increases the risk to the North.

A test of an ICBM is unmistakable given its trajectory and speed.

The major issues over an ICBM’s effectiveness relate to both the robustness of the launch vehicle and warhead, and the quality of the guidance system.

The chances that the North will attain a fully functional ICBM after only a handful of trials are not zero, but fairly close. In the end, the guidance system is the trickiest part of the development process, and must be tested in ways that the U.S. could spot.

In other words, if North Korea tests an ICBM capable of hitting the United States, there is most likely to be a gap, perhaps an extended one, before it attains a reliable system.

North Korea, therefore, would be signaling the intent to deploy a weapon that could deliver nuclear warheads to the United States without having one. And it is in that window, the precise size of which is not fully predictable, that the U.S. could act without risking a nuclear response.

At that point, the U.S. calculus has to be reconsidered.
The U.S. was prepared to risk a regional nuclear weapon in exchange for North Korea's refraining from developing a warhead that could reach the U.S.

Now the U.S. has to determine whether it will risk a North Korean first strike on the United States. And this time, the U.S. is the one that will have to examine what is considered farfetched. Military options that could fail, and assaults on Seoul that had been taken off the table, could be put back on the table.

The regional powers didn’t want a U.S. strike. But now the question is no longer what they will tolerate but what the U.S. can risk. Can the U.S. live with a North Korea capable of striking the United States with nuclear weapons?

This becomes a much different problem, and one that the U.S. has in the past clearly communicated to North Korea, with suitable threats.

This therefore raises the question of why the North would move from a position of relative security, to one where risks to it mount greatly.

Why would North Korea challenge a clear red line that the U.S. has drawn?

What benefit can it gain? If it gets an ICBM, I will assume that it still would not wish to challenge the United States given the size of the U.S. nuclear arsenal.

North Korea has behaved rationally and with cunning in the past.

Why take risks that it didn’t have to?

One explanation is that Pyongyang is fueling this speculation to frame some future negotiations but has no intention of actually testing an ICBM.

Another explanation might be that North Korea read the U.S. political chaos as creating a window between test and deployment that would force negotiations at a time when the U.S. is willing to be more flexible on emerging issues, either for political gain or because of uncertainty of authority.

Or perhaps the North has calculated that a nuclear threat to the United States has more value than what it risks.

There is another theory I will add to the farfetched.

North Korea’s closest ally is China.

I have noted in the past that evolutions in the nuclear threat have tended to take place at times when China was facing significant friction with the U.S. The U.S. would ask China to intervene with North Korea, and then, on returning to the negotiating table, Beijing would reasonably point out that it had done a major service for the United States, and it would be churlish of the U.S. to press China on lesser economic matters.

U.S.-China tensions over trade are ongoing.

A nuclear confrontation with North Korea would certainly divert U.S. attention and passion away from China.

And inevitably, the U.S. would ask China to intervene and be relieved when its intervention succeeds. It is interesting that China has already issued a warning to North Korea not to do anything to destabilize its situation.

Since China ought to welcome the diversion so that it can smooth things out, for a price, the warning to the North makes little sense.

It would explain why North Korea would be taking unnecessary risks in testing ICBMs. Of course, given China’s warning, a test may not even be launched.

A North Korean ICBM test would make little sense, as it would undercut the safety of the regime and the country’s territorial integrity.

But in the world of the farfetched, which we must at least consider, North Korea cannot readily refuse Chinese requests, and signaling that there might be an ICBM test or two is not a major risk and a valuable favor to bank.

I would not throw this scenario out for consideration except that it is hard to understand why North Korea would goad the United States at a time when American politics would seem to make the U.S. less predictable.

The usual American answer on all complex political problems is that the other side is crazy. North Korea has not survived since World War II by being crazy. Ruthless, yes.

Willing to take risk, certainly.

But this particular risk either is an illusion or needs a much stronger imperative.