Moon Hong-chul, Team Head at DB Financial Investment, argues that the fundamental cause of rising interest rates is not oil prices but regulatory leverage and debt valuation methods. He analyzes that high interest rate concerns are unwarranted in a market driven by AI investment.
Superficially, oil prices and Treasury yields appear to move together, but they show a characteristic where there is no reaction to interest rates when oil prices fall, and a significant reaction only when they rise.
Team Head Moon Hong-chul diagnosed that as the market focuses on growth expectations from AI investment, the influence of other variables like oil prices has diminished.
Large-scale capital expenditures in the AI sector are boosting GDP and growth rates, thereby driving interest rate increases.
The interpretation follows that large-scale capital expenditures in the AI sector are a factor raising GDP and growth rates, thereby increasing interest rates. The phenomenon of rising interest rates despite falling oil prices and oil production recovering to pre-war levels could reflect this economic boom, he explained.
When oil prices rise, consumers' disposable income for other expenditures decreases, leading to a ripple effect that dampens consumption in other sectors.
Team Head Moon Hong-chul criticized Federal Reserve members for only focusing on inflation while overlooking structural impacts on the economy.
Based on the falling core consumer price index (Core CPI) in the U.S., he judged that the current economy is in a deflationary phase.
He suggested that rising gasoline prices are not merely inflation but have the effect of reducing other spending power, which can be seen as deflation from a proper economic perspective.
He analyzed that the U.S. economy's AI investment-driven phenomenon is overshadowing all other negative factors, and the market is solely focused on AI investment.
Therefore, he presented an optimistic outlook that as long as the upward trend led by big tech continues, rising Treasury yields will not pose a risk to the market.
While the overall economic aggregate appears robust, the lower end of the economy, such as self-employed individuals and local real estate, faces severe polarization due to the impact of high interest rates.
Big tech companies have the resilience of empires, so the impact of interest rates is minimal, but despite the seemingly problem-free economic aggregate, polarization is severe.
Therefore, the side effects of rising interest rates are concentrated in specific groups or industries, and he explained that there is a need to worry about potential problems arising at this point.
It is pointed out that the key variable in the current stock market is not interest rates. The market has already priced in the continuation of AI investment and rising interest rates.
Therefore, a short strategy that goes against the direction of interest rates is risky, and he recommended conforming to market trends.
He emphasized that corporate growth potential, or the expectation for the future (dream), is more important in the stock market than a 100-200bp increase in interest rates.
Outwardly, oil prices and long-term interest rates appear to move together, but there is a tendency for no reaction to interest rates when oil prices fall, and a reaction only when they rise.
Team Head Moon Hong-chul reiterated that while oil prices can be a catalyst for rising interest rates, they are not the fundamental cause.
He explained that crude oil supply issues from the Middle East have largely recovered in terms of volume, so oil price fluctuations are not the core driver of long-term interest rates.
Insurance companies and pension funds have accounting and regulatory systems that value liabilities according to interest rate changes, unlike assets.
When interest rates rise, the value of liabilities decreases more significantly than assets, leading to an improvement in reported solvency. This eliminates the incentive to purchase long-term government bonds to match duration, and instead, a 'regulatory leverage' phenomenon emerges where flexible private assets are preferred, distorting demand for long-term bonds.
During periods of rising interest rates, an asset-liability mismatch can even lead to valuation gains.
In such a situation, investors avoid purchasing long-term bonds, fearing losses if they hold them.
As the reported maturity of liabilities becomes shorter than asset maturities, creating an inversion, asset management companies are strengthening their arguments to avoid purchasing ultra-long-term government bonds.
This leads to an inversion where the reported maturity of liabilities becomes shorter than asset maturities. He explained that this improvement in solvency metrics can be used by asset management companies as a rationale to avoid purchasing ultra-long-term government bonds.
He added that one should wait to buy until the market trend changes, and at that time, institutional investors will also actively re-enter the market.
He explained that institutional investors also currently hold a negative view on purchasing long-term government bonds.
It's not that they can't, but they simply won't buy. When interest rates fall, there's a time when the trend changes, and then they'll buy diligently again. But I don't need to be the first.
Regarding the R-G debate that debt is offset if nominal GDP growth is higher than bond yields, Team Head Moon assessed that it is true for now.
Currently, U.S. interest expenditure relative to GDP is around 3-3.5%, and nominal GDP growth is higher, creating a debt-melting effect. However, he warned that if this continues long-term and refinancing persists, the burden of 5-6% interest rates could increase.
He explained that the market's negative view on AI tends to be projected as concerns about high interest rates, but in reality, AI companies are not unable to invest due to high interest rates.
He pointed out that people who dislike AI in the market expect that investments will be impossible due to high interest rates, but this differs from reality.
The financial services fee component in the U.S. Personal Consumption Expenditures (PCE) inflation calculation method has been changed to exclude asset price increases.
This change resulted in a 0.3 percentage point decrease in past inflation indicators, leading some to raise suspicions of inflation manipulation. However, Team Head Moon presented the position that there had been debate from an economic perspective on the validity of reflecting asset price increases in inflation, and this was an adjustment for statistical consistency, not a conspiracy theory.
Team Head Moon Hong-chul stated that he does not believe monetary policymakers rely entirely on data for their decisions. Rather, policy decisions are already made in advance, and data such as employment indicators are merely justifications for those decisions, he analyzed.
He speculated that the greater the volatility of employment indicators, the greater the autonomy of policymakers, and antipathy towards Trump could be a practical basis for interest rate policy decisions.
He suggested that the current break-even employment estimate is around 40,000 cases per month, and there may be political considerations behind policy decisions based on such indicators.
He emphasized that from a trader's perspective, in a bull market with all-time highs and new records, it is more important to follow the trend than to seek reasons.
Answers come from the transcript, with the exact spot cited.
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