The U.S. Federal Reserve cut its benchmark policy rate, the federal funds rate, by 0.25 percentage points on October 30, lowering it to 1.50-1.75%. It was the third consecutive cut this year, following moves at the end of July and in mid-September. At the same time, the Fed signaled to the market that it would be difficult to cut rates much further for the time being.
In its statement, the Fed said that “the labor market remains strong and that economic activity has been rising at a moderate rate,” citing solid job gains, low unemployment, and rising household spending, while also noting that inflation had remained below the Fed’s 2% target over the previous twelve months. At the same time, it acknowledged weaker business investment and exports, explaining that it had decided to lower rates “in light of the implications of global developments for the economic outlook as well as muted inflation pressures.”
Ever since sometime around the middle or back half of last year—when buying U.S. stocks suddenly, and rather absurdly, became a trend among retail investors here—and especially since this past summer, when the KOSPI even briefly broke below 2000, I have given the same answer every time non-finance acquaintances asked me, “Should I buy U.S. stocks? now”
Me: “Well, to begin with, U.S. stocks come with fairly steep base commissions if you use a local broker, and if you trade through a Korean securities firm there are additional fees on top of that. Then you also get hit with another 20% in taxes on financial income. Money leaks out of the trade in two or three different ways, so why bother? And you should not be investing in a country you do not really understand, right? Do you even know how to look up filings on the SEC website? All the information on the companies you would be investing in is going to be in English. Can you read and interpret all of that? If you are at the point where you would have to rely entirely on what other people tell you, then you should not be investing in the first place.”
Friend: “Fair point. Then what am I supposed to do? Buy dollars or gold instead? I keep hearing the U.S. economy is doing great.”
Me: “I am not so sure. When I was working in the Boston financial district last summer, the U.S. economy did not appear to be in bad shape, but neither was it as exceptionally robust as the media proclaims.”
Friend: “Really? Then why are Korean newspapers making such a fuss about some huge boom in the U.S. economy? That is why everyone around me has been buying U.S. stocks lately.”
Me: “Trump’s reelection is not far off, is it?”
Friend: “Ah, right.”
I thought I had written this on the blog as well, but I could only find the following comment.
Subscriber Comment (2019.08.02. 12:30):
I am holding about KRW 2 million worth of dollars right now. Would it be better not to sell?
My Response (2019.08.02. 18:40):
If it were me, I would sell and buy the KOSPI… but the decision must be yours.
Since this was a response after the market closed on August 2, had the individual purchased a KOSPI ETF on the next trading day (August 5)—not even the specific stocks I had recommended privately and never disclosed on the blog—the return would have been +10.05%.
- I have not looked up every last piece of data because due to a lack of time and interest, but from my subjective perspective as a junior professional, the sentiment in the U.S. is lackluster—at least within the job market. It feels late-cycle. Since last year I have been back in Korea for personal recovery and other matters, and given that the U.S.-China trade war ended (or was suspended) rather vaguely, it is difficult to be definitive.
2-1. I remain convinced that the adage—“when shoeshine boys and taxi drivers talk stocks, it is time to sell”—which informed the advice I gave to an acquaintance in late 2017 when Bitcoin traded above KRW 20 million (see the 2018.01.18. post).
I met that acquaintance again after writing that post. He told me he had followed my advice, sold out completely in the KRW 20 million range at the end of 2017, and then bought a house in Seoul.
Given that he sold Bitcoin at the end of 2017 and registered the deed in Seoul in early 2018, imagine the scale of the capital gains he has realized to date.
2-2. Most people do not have Bloomberg installed at home―…surely? You don’t, do you?. Unless they have passed at least the FAR section of the AICPA or Level I of the CFA, they are likely unfamiliar with U.S. GAAP. Unless they were already investing steadily in U.S. stocks, they are probably not used to pulling filings from the SEC. Unless they were raised or studied abroad in English speaking countries, reading hundreds or thousands of pages in English should not be easy. If they do not live in the United States, they cannot even use the simplest Peter Lynch-style strategy of “invest in what you know." And of course they cannot conduct site visits or engage in Q&A with Investor Relations (IR) officers.
Once you take all of these factors into account, there is no obvious reason why the average Korean retail investor should have a higher hit rate—or lower risk—investing in U.S. stocks than in Korean ones. When I see this whole “I’m going all in and doubling down” attitude toward U.S. stocks everywhere, I cannot help thinking that this may be the moment to sell U.S. stocks, not buy them.
If this ends up turning into one of those cases where people say, “See? U.S. stocks went up after all,” then fine—I will have nothing to say other than the excuse that “not even God knows where stock prices are headed, and only Mr. Market does.”
By the end of the second quarter next year, it will become clearer whether this upward trend is supported by fundamentals or was being forcibly sustained by the government.
As always, let the music play until everything collapses.