Foreign investors' semiconductor 'shaking out' strategy is due to protocols, not collective intelligence

A claim has been raised that the recent downturn in the semiconductor market is a 'sheep shearing' strategy by foreign investors. Moon Hong-chul, Head of Asset Strategy at DB Financial Investment, interpreted this phenomenon as intentional 'shaking out' by foreigners. He explained that foreign investors prefer to profit by shearing investors' 'wool' and diagnosed the current semiconductor market situation as part of such a shaking out.

Moon emphasized that these movements by foreigners are not simple market fluctuations but strategic actions with specific intentions. He analyzed that they profit by shaking individual investors' sentiments to induce low-price buying.

Regarding the phenomenon of foreign investors moving as if they were a single force, Moon Hong-chul explained it as behavior based on internal protocols rather than 'collective intelligence.' He pointed out that while foreign investors also consist of numerous individuals and institutions, they show a consistent pattern in their trading behavior, as if by agreement. This analysis suggests that thousands of foreign investors are not moving individually but acting according to common rules.

Moon suggested that such collective movements by foreigners are not merely coincidental but indicate that a specific internal system is at work.

Moon Hong-chul stated that common operational 'protocols' of foreign institutional investors cause their collective movements. These protocols are called 'systems' and are applied similarly in most institutional investment companies, he explained. He added that just as the National Pension Service invests according to set rules, foreign institutional investors also follow the same rules, which makes them appear as if they are a single force.

In conclusion, the movements of foreign investors are analyzed to be driven by systemized rules rather than individual judgments, and this is the fundamental reason for the consistent trading patterns observed in the market.

Foreign investors conduct mechanical trading, showing a pattern of selling when stock prices rise and buying when they fall, explained Moon Hong-chul. He gave the example of foreigners continuously selling semiconductor stocks when they went up. They maintained a buying position when the index was at 3,000, sold when it approached 4,000, bought again when it exceeded 4,000, and sold again when it surpassed 5,000.

Moon added that this trading behavior occurs as new investors enter the market, not necessarily the same entities that previously bought and sold. This suggests that foreign investors tend to react mechanically to price fluctuations.

An analysis suggests that recent futures trading for Hynix and Samsung Electronics is occurring 24 hours a day in the 'hyper-liquid' coin market, outside of government control, and significantly impacting the domestic stock market. Moon Hong-chul explained that leverage of 10x or more is traded year-round in this hyper-liquid market.

He pointed out that the phenomenon of the 'tail wagging the dog' is intensifying, where prices in this coin market actually influence the Korean market. This means that new forms of trading, beyond the control of traditional financial markets, are contributing to increased volatility in the domestic stock market.

Moon Hong-chul predicted that Hynix would eventually reach 300 (thousand won), though it would take time. He stated that while current semiconductor and AI bears primarily cite interest rate hikes, he believes interest rates are overstated. Moon expected interest rates to rise slightly in Q3 but stabilize and begin to fall around Q4 this year.

He offered a positive outlook, stating that such interest rate stabilization would create a favorable environment, especially for tech stocks. From a macroeconomic analysis perspective, he considers the impact of interest rate changes on the tech stock market to be significant.

Bond investors hold a very negative view of tech companies, tending to highly rate the risks of tech stock bonds, unlike stable companies such as Coca-Cola, Moon Hong-chul pointed out. Bond investors are reluctant to invest in tech stocks because it's difficult to predict if the companies will still be viable in 5 or 10 years, he said. He mentioned that, apart from large corporations like Apple, it's hard to be confident that companies like Google or Anthropic will exist in 10 years, comparing this to Coca-Cola, which is expected to be around in 20 years.

This conservative perspective of bond investors suggests it could disadvantage tech stocks in terms of fundraising.

Moon Hong-chul pointed out that even economists often misunderstand inflation. He emphasized that the core of inflation is whether price increases for specific goods 'diffuse.' It's natural for prices of certain items like oil, rice, apples, or chips to rise, but the crucial point is how much that price increase spreads to other inflation items.

From the perspective of monetary policy, inflation is not merely the price increase of a few items but whether that upward trend pushes up the overall price level across the economy. He stressed the need to monitor the ripple effect of specific commodity price changes on overall inflation.

Moon Hong-chul argued that claims about rising oil prices, tariffs, and chip prices driving inflation need to be heard with caution. He explained that even many economists make these claims, but there's a crucial premise behind them. The key is whether price increases can actually be 'passed on' to consumer prices. This means that even if production costs rise, companies cannot necessarily reflect all those costs in product prices and pass them on to consumers.

If market competition is fierce or demand is insufficient, companies may have to absorb cost increases themselves. Therefore, Moon's analysis is that one cannot simply conclude that rising costs directly lead to rising inflation. This perspective suggests that inflation factors need to be analyzed from multiple angles.

Contrary to the common notion that it's difficult to lower interest rates immediately after raising them, such instances have occurred frequently historically, Moon Hong-chul emphasized. He explained that by examining the history of central bank policy rate changes, one can easily find cases where rates were raised and then suddenly lowered.

This suggests that the fixed idea that an interest rate hike cycle, once started, will last for a long time may be incorrect. Based on these historical examples, Moon argued that flexible thinking is needed regarding the current direction of interest rate policy.

A claim emerged that, contrary to the reported figures, U.S. employment indicators are actually not good. Moon Hong-chul stated that he would be the first to reveal the 'truth about U.S. employment,' which no one else in the world talks about, asserting that the reported indicators do not accurately reflect reality. He believes that the actual situation of the U.S. job market is much weaker than what the indicators show.

This assertion questions existing assessments of the U.S. job market, which is fundamental to the U.S. economy, and suggests the need for analysis from a different perspective. Moon emphasized focusing on the reality hidden behind official indicators.

U.S. employment figures are measured by two methods, but only enterprise survey results are mainly reported in the media, with household surveys rarely appearing, Moon Hong-chul pointed out. He questioned why household surveys, which are part of the same employment survey, are not mentioned in the news. Enterprise surveys are based on corporate activities such as new hires or layoffs, while household surveys directly ask individual household members about their employment status or unemployment.

Moon explained that while experts review both surveys, only enterprise survey results are communicated to the public, making it difficult to grasp the true picture of the employment market.

Moon Hong-chul speculated that there might have been changes in the calculation method of employment indicators after the replacement of the head of the U.S. Bureau of Labor Statistics. He analyzed that the currently announced employment indicators seem to reflect a higher weighting on 'recent trends.' This is his 'personal theory' but was presented as a hypothesis that could explain the distortion in the indicators.

The replacement of the head of the Bureau of Labor Statistics can affect statistical calculation methods or weighting criteria, raising questions about the reliability of the final employment indicators. Moon believes that these changes could exacerbate the discrepancy between the actual employment situation and the indicators.

If this speculation is true, it implies that the employment figures currently released by the U.S. government may be interpreted more optimistically than the actual economic situation. This could be a significant problem as it might send incorrect signals to policymakers. Moon is attempting to grasp the reality behind the indicators through this hypothesis.

The Bank of Japan has often intervened in the foreign exchange market alone, but this is the first time it has intervened in cooperation with the United States since the 1998 Asian financial crisis, Moon Hong-chul stated. He emphasized that U.S.-Japan coordinated intervention is a very rare event, usually occurring once every 20-40 years, and it invariably has an effect.

Moon presented a dollar-yen exchange rate graph, explaining that the Bank of Japan's solo interventions did not change trends, but coordinated interventions, marked by dotted lines during the 1998 Asian financial crisis and the Great East Japan Earthquake, had significant effects. He analyzed that this U.S.-Japan coordinated intervention would be a strong signal in the foreign exchange market.

Such coordination can be interpreted as carrying a larger policy will beyond mere defense of the yen's value. This is evaluated as an event that will significantly impact the future direction of the foreign exchange market.

Concerns have been raised that the scale of yen-carry trade is astronomical, and if Japanese investors withdraw overseas investments, the U.S. market could be hit. Moon Hong-chul explained that a tremendous amount of yen-carry funds has been released since 2013 or after the COVID-19 pandemic. He clarified that yen-carry is often mistakenly understood as simply hedge funds shorting the yen, but true yen-carry originates from Japanese citizens' overseas investments.

Japan is a country where its citizens are poor but nationally, it is a wealthy nation with vast overseas assets, and overseas investment surged with the prolonged weakness of the yen. Moon warned that if the yen's value turns to a long-term appreciation, not just a short-term movement, Japanese investors are likely to quickly repatriate their overseas investments, which could cause a significant shock to the U.S. market. He added that where Japanese investors have invested is a crucial issue.

A forecast suggests that if the yen strengthens, over half of yen-carry funds could flow out to Japan. Moon Hong-chul explained that historical patterns show that when funds that went overseas return to Japan, more than half tend to be repatriated.

This implies that a shift to a strong yen could trigger a change in large-scale capital flows beyond mere exchange rate fluctuations. If such capital outflow materializes, it is expected to have a significant ripple effect on global financial markets, including the United States. Moon's argument demonstrates one aspect of macroeconomic analysis that predicts future possibilities based on past examples.

Japanese yen-carry funds amount to approximately 1.8 trillion dollars, which may seem small, less than 5% of the total U.S. stock market size of 40 trillion dollars, but it raises concerns about a cascade of fund outflows. Moon Hong-chul explained that in terms of the circulating stock ratio, it's less than 5%.

However, he emphasized that if Japan begins large-scale selling, fund managers would inevitably have to move in succession. This suggests that due to psychological factors in the market and herd behavior among investors, the impact of large-scale capital outflows from a specific country on the overall market can be greater than the mere figures. Moon warned about this potential for cascading outflows, identifying it as a potential factor for market instability.

Moon Hong-chul assessed that the simultaneous cooperation between the U.S. and Japan is a very significant event, signaling the beginning of a shift towards strengthening the yen. He emphasized that in the past, Japan frequently asked the U.S. for foreign exchange market intervention, but the U.S. rarely complied, whereas this time it did. This implies policy coordination beyond mere short-term intervention.

He mentioned that the foreign exchange market was indeed greatly surprised, with the dollar-yen exchange rate falling from 164 yen to 155 yen. Foreign exchange traders are aware of the seriousness of this U.S.-Japan cooperation, and Moon analyzed that it is a clear signal of a directional shift to boost the yen's value again. This cooperation could mark the beginning of a long-term appreciation of the yen.