The Market Isn't Crazy, You're Wrong

Since the 2008 financial crisis, major central banks have injected massive liquidity into the market. The combined assets of the European Central Bank (ECB), the U.S. Federal Reserve (Fed), and the Bank of Japan (BOJ) total $17.6 trillion, meaning about 40 quadrillion Korean won of base money has been released into global financial markets. Al Sang-mu, Department Head, explained that this central bank generosity dominates modern financial markets.

This liquidity injection has been a major factor in driving up asset prices—stocks, bonds, real estate—for an extended period. With the increasing influence of monetary policy on the market, central bank policy direction has become even more critical for investment decisions, beyond traditional indicators like corporate earnings, according to analysis.

It was emphasized that central bank liquidity supply has a massive impact on financial markets, and investors must understand these macroeconomic trends and incorporate them into their investment strategies.

The central bank's asset growth rate was presented as a significant indicator for gauging the direction of the stock market. Al Sang-mu, Department Head, argued that if central bank assets increase compared to a year ago, the stock market is positive, and conversely, if they decrease, the stock market performs poorly. This reflects the view that central bank liquidity supply directly impacts the market.

From 2022 to 2024, a phenomenon was observed where the stock market underwent corrections as central bank assets decreased or their growth rate slowed. This suggests that the central bank's tightening policy is acting as a causal factor for market decline. The far-reaching effects of changes in monetary policy on asset markets were emphasized.

This analysis implies that investors must closely monitor changes in central bank balance sheets in addition to corporate earnings, as central bank asset reduction can exert continuous downward pressure on the market.

Al Sang-mu, Department Head, affirmed the close relationship between central bank asset growth and the stock market, stating, “If it grows more than a year ago, the stock market is fine. But if it shrinks more than a year ago, the stock market is not good.”

The KOSPI's peak on June 19th is analyzed to have stemmed from an imbalance between excessive optimism about the memory semiconductor industry and the global tightening trend. Al Sang-mu, Department Head, explained that the market at the time rose too quickly, ignoring central banks' tightening announcements, and this accumulation ultimately led to a significant correction.

Despite major global central banks intensifying their tightening policies through asset reduction and interest rate hikes, the domestic market continued its upward trend, driven by optimistic outlooks for specific industries. This indicates that the market's underestimation of changes in the macroeconomic environment was the primary cause. Al Sang-mu, Department Head, diagnosed the situation by stating, “June 19th was the KOSPI peak, and I believe that accumulated.”

Many investors tend to stick to the simplistic view that stock prices rise when corporate profits increase, Al Sang-mu, Department Head, pointed out. However, stock prices are determined by a complex interplay of various factors beyond corporate profits, including interest rates, liquidity, government policies, and supply and demand. Relying solely on corporate profits without considering these diverse variables can lead to errors.

Al Sang-mu, Department Head, explained that there are cases where the stock market holds up through economic growth even in a negative liquidity environment. This means that while a decrease in liquidity does not necessarily lead to a market decline, its influence is very significant. It was emphasized that even if corporate profits are excellent, stock prices can be constrained if the liquidity environment deteriorates.

Ultimately, stock price determination is a complex multi-variable equation, and relying on a single factor is dangerous. Investors must always have a broad understanding of the macroeconomic environment and policy changes when investing.

Al Sang-mu, Department Head, stated, “I always feel that people view it a bit too simplistically, thinking if a company makes money, the stock price goes up,” pointing out the limitations of judging stock prices solely by corporate profits.

An analysis suggests that pursuing 'normalization' is extremely difficult within the current economic structure. Normalization, meaning tighter policies through interest rate hikes and liquidity withdrawal, inevitably accompanies a stock market decline and financial market instability. Al Sang-mu, Department Head, believes that if economic normalization proceeds, the U.S. market's upward trend will reverse, leading to significant damage to stock and financial markets.

Furthermore, declining growth rates would generate unemployment, posing a significant political burden. This is a structural contradiction, like knowing the need for a diet but finding it hard to implement. It is pointed out that while everyone recognizes the need for economic restructuring, the short-term pain involved makes normalization difficult to sustain. Al Sang-mu, Department Head, expressed the difficulty of normalization, saying, “Because if you normalize, the stock market collapses. Or, well, the financial market collapses.”

Al Sang-mu, Department Head, emphasized that structural contradictions exist in the current financial system, and investors must acknowledge and confront them. Denying or ignoring these contradictions is undesirable; coldly accepting reality is the correct attitude for an investor. He clearly stated that he maintains a pessimistic outlook on the possibility of normalization and that the problems inherent in the current system must be recognized.

In a situation where economic normalization becomes difficult and financial market uncertainty grows, investors need to strive to grasp the essence of phenomena rather than leaning towards premature optimism or pessimism. The message is that recognizing the system's structural flaws is the first step towards risk management.

Al Sang-mu, Department Head, emphasized the attitude investors should have, saying, “It's important to acknowledge that there are contradictions, but you shouldn't say they aren't, or pretend you don't know about them, or can't see them. You must confront them but also accept them.”

It was pointed out that the spot exchange rate typically viewed by stock investors can differ from the exchange rate actually borne by companies. Exporting companies use various hedging strategies, such as FX swaps, to manage exchange rate fluctuation risks, and as a result, the actual impact of exchange rates on corporate performance can differ from spot exchange rate movements. Therefore, simply predicting corporate performance based solely on the spot exchange rate can lead to errors.

Al Sang-mu, Department Head, emphasized the need to consider companies' internal hedging ratios and argued that the exchange rate should be viewed as a secondary indicator in stock investment. The impact of exchange rate fluctuations on corporate performance is complex, and it is difficult to see a simple rise in the spot exchange rate as directly leading to an increase in profits for exporting companies.

Investors should consider companies' hedging strategies and their actual foreign currency debt or asset size when interpreting exchange rate indicators. It is more important to understand a company's overall financial health and business model than to focus excessively on a single variable like the exchange rate.

Al Sang-mu, Department Head, explained, “The spot exchange rate you are looking at is different from the exchange rate companies are actually bearing,” emphasizing the reality of corporate exchange rate management.

The common fear surrounding increasing debt was argued to be a flawed economic notion. Instead, debt growth can be interpreted as an indicator that the capitalist system is advancing, rationalizing, and developing. As financial markets develop, the system of lending and borrowing becomes more sophisticated and diversified, making debt growth a natural phenomenon.

Al Sang-mu, Department Head, warned that from an overall economic perspective, a sharp reduction in debt could actually be more dangerous for the economy. A rapid contraction of debt implies a reduction in consumption and investment, which can diminish economic vitality. He emphasized that what matters more than debt itself is where and how the debt is being used.

Therefore, rather than having an vague fear of debt, it is concluded that insight is needed to analyze how debt functions in different parts of the economy. Al Sang-mu, Department Head, questioned, “Debt growth is an indicator of how good the world is getting, how advanced, how rationalized, how developed, so why are we so afraid of increasing debt?” proposing a new perspective on debt.

It was pointed out that there are no 'Bond Vigilantes' in the Korean market. Bond vigilantes refer to a phenomenon where the bond market exerts pressure, such as through interest rate hikes, in response to irresponsible government fiscal spending or increasing debt. While the U.S. may discuss the possibility of a technical default due to congressional debt ceiling issues, Korea has a structure where the government can print Korean won to repay debt if necessary, thus virtually eliminating the incentive for default.

This difference suggests that the Korean government's debt management approach and market reactions may differ from those in the U.S. The government's ability to repay debt by issuing won creates an environment where the bond market finds it difficult to strongly curb government fiscal policies. Consequently, the Korean bond market may be relatively less critical of government fiscal policy.

Al Sang-mu, Department Head, emphasized the unique characteristics of the Korean market, stating, “There are no bond market vigilantes in the Korean market. Because there's no way they won't repay.”

The polarization and winner-take-all phenomenon occurring in capitalist societies were interpreted as a result of market efficiency proving itself. The smarter and more rational consumers become, the more capital and opportunities will inevitably concentrate in a few companies that provide truly good products or services. This was seen as a natural process in a capitalist competitive system where efficiently operated companies eventually monopolize the market.

Al Sang-mu, Department Head, explained this phenomenon as the destiny of capitalism, mentioning that consumers' rational judgments could ultimately lead to greater polarization. In other words, the more efficiently the market operates, the more wealth winners accumulate, which can inevitably deepen wealth inequality.

In conclusion, the pursuit of efficiency within the capitalist system inevitably exacerbates polarization, and this is a result of the normal functioning of the market. Al Sang-mu, Department Head, pointed out the paradox of capitalism, asking, “Isn't that the result of consumers' wise judgment? The smarter consumers become, the more they'll buy only truly good things, so won't polarization increase even more?”

Concerns have been raised that while massive funds are flowing into the AI hyperscaler industry, this could be a 'bottomless pit.' Since enormous capital continues to be injected despite the uncertain timeline for AI technology to yield results, if it fails to perform as quickly as expected, it could deliver a significant shock to capital markets, according to analysis.

Al Sang-mu, Department Head, believes that while the potential of the AI industry is great, its uncertainty is equally high. He warned that if actual profit generation or technological commercialization is delayed despite the current massive investments, both investment and debt could contract simultaneously, negatively impacting the entire market. Al Sang-mu, Department Head, emphasized the risks of AI investment, stating, “That's why hyperscalers are a bit, shall we say, dangerous; they could be a bottomless pit. A lot of money is going in, but no one knows when it will yield results.”

It has been argued that AI investment has become a core tool for national hegemonic competition, beyond mere corporate profits. Both the U.S. and China perceive the AI industry as a critical matter related to their national destinies. It is analyzed that even if private companies cease investment, the state is likely to continue funding AI. China, in particular, has already established a system where the state directly manages the AI industry.

This implies that AI technology development has become a key factor determining national security and economic superiority, beyond simple technological competition. Therefore, while AI is being developed with the help of private companies, its ultimate goal lies in the strategic interests of the nation. Al Sang-mu, Department Head, predicted that even if private investment shrinks, governments will continue to fund AI, even by printing money.

In conclusion, the AI industry is at the forefront of global hegemonic competition, and due to this characteristic, investment is likely to continue at a national level, differing from typical market logic.

Al Sang-mu, Department Head, emphasized the national importance of AI investment, saying, “They're building it with the hands and power of companies, aren't they? Both in the U.S. and China... since it's related to national destiny, they'll give money even by printing it.”

Following Russia's exclusion from SWIFT (Society for Worldwide Interbank Financial Telecommunication), a prominent phenomenon is that central banks worldwide are losing trust in the dollar system and massively buying gold as reserves. This is due to growing concerns that they might not be protected within the dollar-centric international financial system. In particular, major central banks, including China, are increasing their gold holdings in foreign exchange reserves.

This phenomenon, combined with the selling of U.S. Treasury bonds, is acting as a factor driving up gold prices. It is interpreted as a move to reduce reliance on dollar assets and strengthen national security through asset diversification.

In conclusion, the Russian sanctions are creating cracks in dollar hegemony, leading to a shift in the international financial market landscape and an increase in the value of safe-haven assets like gold, according to analysis. Al Sang-mu, Department Head, explained, “As Russia was excluded from SWIFT, central banks stopped trusting the dollar. They thought they might not be protected by the dollar system, so they are buying a huge amount of gold as reserves.”

It has been argued that the inflation rate indicator is 'deceptive,' and the absolute price level continues to rise. Governments and central banks can manipulate the perception that inflation is under control by using time lags, but actual living costs continue to climb. Even if the inflation rate itself decreases, the already elevated price levels may persist or even increase further, making expectations for interest rate cuts inappropriate.

Al Sang-mu, Department Head, predicted that even if the inflation rate declines, high interest rates are likely to be maintained. This suggests that inflationary pressures have not been fully resolved, or that central banks will not easily revert to past low-interest rate policies. Therefore, investors need to abandon premature expectations of interest rate cuts and adapt to a high-interest rate environment.

In conclusion, it was emphasized that rather than blindly trusting current inflation indicators, a comprehensive judgment of absolute price levels and central bank policy intentions is crucial, and a realistic understanding that an era of high interest rates will continue for the time being is important. Al Sang-mu, Department Head, affirmed, “The inflation rate indicator, as I wrote, is deceptive. The absolute level is continuously rising... The inflation rate may decrease over time, but interest rates won't go down.”

A criticism has been raised regarding the reliability of market consensus on corporate earnings forecasts. Al Sang-mu, Department Head, stated that the market has never correctly estimated corporate earnings, always getting it wrong. This suggests the need to be cautious about unconditional optimism regarding future earnings estimates and to apply a certain discount.

Investors should be aware of past errors in earnings estimates and approach them from a conservative perspective, rather than being swayed by rosy forecasts for corporate earnings. In the current highly uncertain market situation, excessive reliance on future earnings estimates can lead to risky investment decisions. Al Sang-mu, Department Head, pointed out the limitations of market consensus, saying, “It has never accurately estimated earnings. The market has never gotten it right.”

Criticism has been raised that Korean corporate management lacks the will to boost stock prices and exhibits a somewhat passive attitude. Al Sang-mu, Department Head, stated, “I don't think many entities want stock prices to rise. Managers and management teams seem a bit bothered. I feel like they're thinking, 'Why should I boost the stock price?'” pointing out the absence of shareholder-friendly policies. This is interpreted to mean a lack of proactive efforts to enhance shareholder value, such as through capital increases.

It is argued that shareholder capitalism is still underdeveloped in the Korean market, and management tends to prioritize company or personal interests over shareholder interests. It was emphasized that this perception must change for corporate value and stock prices to rise in the long term.

In conclusion, a shift in corporate management's perception of shareholder value and the strengthening of shareholder capitalism are crucial tasks for the development of the Korean stock market.