The previous posts regarding the Fed rate:
Will the Federal Reserve Raise Rates in September, and How Would U.S. Tightening Affect Korean Equities? (2015.09.02.)
The Anticipated Reprieve: The Fed’s Rate Hike Postponement and Its Implications for the KOSPI (2015.09.18.)
KOSPI Surpasses 2,050 Intraday: The Probability of a Year-end Fed Hike and the KOSPI’s Trajectory
2015. 10. 22. 03:33
Following the market collapse precipitated by China’s surprise devaluation of the yuan, the index fluctuated in the high-1800s to mid-1900s range while awaiting the interest rate announcement. In the aforementioned posts, written during the period when the rate hike ultimately did not materialize, I posited the following:
While the improvement in employment indicators was cited as a factor heightening the probability of a September rate hike, these figures represent a statistical distortion that existed only on paper.
Although Governor Lee Ju-yeol of the Bank of Korea hinted at a potential rate hike in October, such remarks merely constitute a preemptive maneuver—a common tactic employed by senior officials seeking to insulate their reputations against the embarrassment of being proven wrong. I maintain that there will be no U.S. rate hike until next year; even if enacted, it will likely be confined to a marginal increase at year-end.
Based on technical analysis, KOSPI appears poised to recover to the 2050 level before the end of the year.
Consistent with these projections, the index surpassed 2,050 earlier today—reaching an intraday peak of 2,053.95—before retreating to a close of 2,042.98.
Until the December rate decision and the 4Q earnings announcements, the market is expected to fluctuate within a corridor of 1,920 to 2,090, while gradually raising its support base.
As I have consistently asserted since June, unless the Federal Reserve identifies a compelling fundamental reason to act, a rate hike this year remains improbable. Even if enacted, it will be limited to a small increase. My view remains steadfast: irrespective of the hike itself, the announcement may serve as a positive medium-term catalyst for the equity market.
Clear Signs of a Deferral in U.S. Interest Rate Hikes
2015. 10. 27. 02:18
U.S. Federal Reserve Rate Hike Within the Year Increasingly Improbable
The Wall Street Journal (WSJ) reported on the 25th (local time) that the prospects for a rate hike by the Federal Reserve (Fed) within the current calendar year are increasingly fading.
This reassessment is driven by global economic headwinds—characterized by the deceleration of Chinese growth, the precipitous decline in Japanese exports, and the downward revision of inflation forecasts across Europe—which have collectively created broad uncertainty about the U.S. economic outlook.
Furthermore, the release of mixed domestic economic indicators over the past several months suggests that the Fed will face substantial obstacles to initiating liftoff before the year’s end.
As I have consistently maintained, a rate hike within the current year remains exceedingly improbable. This conclusion can be readily confirmed by a cursory review of the primary indicators governing U.S. monetary policy.
Fed Maintains the Status Quo on Interest Rates … Implicit Signals of a December Hike: A Foregone Conclusion as Previously Asserted
2015. 10. 29. 10:03
The United States remains fundamentally incapable of initiating a rate hike within the current calendar year. To be more precise, it lacks the structural capacity to do so; even if an adjustment were to materialize in December, it would be restricted to a marginal increase. Since June, I have shared with my colleagues my view that no rate hike would take place this year, a position I have consistently articulated on this blog since early September.
In addition to my previous analysis (2015.09.18.), which addressed the monetary dimensions of this issue, the real economy warrants further scrutiny—specifically regarding the fraudulent nature of employment indicators. Since the inception of the second Obama administration, the United States has engaged in statistical artifice, manipulating the denominator of employment metrics, such as by classifying part-time workers as ’employed’ and thereby excluding them from ‘unemployment’ statistics. Global media outlets have, in my view, deliberately propagated this narrative. Should a rate hike occur in December, it would serve as a calculated maneuver to exert downward pressure on the equity markets rather than reflect a substantive amelioration of the U.S. labor market.
It may sound confusing to some readers; my claim is that ’the rate decision announcement’ itself is the rate decision announcement itself is a positive catalyst in the short run as prolonged uncertainty is resolved, especially considering that the incremental hike will be marginal. Nonetheless, irrespective of its amount, ‘a rate hike’―<span class = “append
if it materializes―should worsen valuation risk, resulting in downward pressure on the stock market. Since the current valuation level is not burdensome, I do not think that any marginal hike would become a huge concern even if it materializes.
Given that the employment index is not credible and manufacturing indices released last month failed to catalyze a policy shift, the primary variable remains the trajectory of crude oil prices. However, the current trend in crude oil prices toward sideways movement or further declines, precipitated by oversupply, is likely to persist for the foreseeable future. Consequently, commodity price movements must be meticulously monitored.
Even in the event of a rate hike, the KOSPI is unlikely to experience significant turbulence, having already been inoculated against such exogenous shocks through repeated prior exposure. The resolution of prevailing uncertainties is more likely to yield a favorable market environment, notwithstanding the potential for short-term volatility engineered to facilitate capital reallocation from retail investors to institutions.
Improved U.S. Employment Indicators: A December Rate Hike Imminent?
2015. 11. 9. 13:31
USD/KRW Rate Jumps Above 1,150 on Strong U.S. Economic Data
Overnight, U.S. employment data significantly exceeded the forecasted 180,000, coming in above 270,000. Buoyed by signs of economic recovery, the narrative of a December rate hike has gained substantial traction. In response, the KOSPI retreated to the 2,025 level, while the USD/KRW exchange rate surged by 11.6 won at the opening.
It is remarkable that despite the perennial nature of rate-hike discourse, the KOSPI continues to exhibit a precipitous decline at every mention. Given that expectations of a rate hike inherently imply an anticipation of economic amelioration—as evidenced by the positive closures of the Shanghai and Nikkei indices, one must question the KOSPI’s unique susceptibility to downward pressure. The market’s chronic underperformance emphasizes the so-called “Korea Discount.”
Back to the main point, I have maintained since June that a rate hike within the current year is fundamentally improbable, or at most, would commence as a marginal adjustment in December. I have contended that the employment indicators constitute a form of statistical artifice; barring a sharp appreciation in crude oil prices, a rate hike remains structurally untenable from a macroeconomic perspective. Nevertheless, the possibility that the United States might opt for a disruptive policy shift cannot be disregarded, and it appears such a course is being charted.
The questionable correlation between recent employment data and genuine economic recovery is meticulously analyzed by Professor Justin Wolfers of the University of Michigan in his New York Times op-ed, “Is the Economy Overheating? Here’s Why It’s So Hard to Say” (2015.11.07.).
The latest reading of the Fed’s preferred gauge—the price index for personal consumption expenditures—suggests an inflation rate of only 0.2 percent over the past year, or 1.3 percent when excluding volatile food and energy prices. By this view, the economy is nowhere near overheating.
And the early warning signals—developments in wage growth—tell a similar story. A 2 percent inflation target roughly translates into a 3 to 3.5 percent target for wage growth in an economy experiencing 1 to 1.5 percent productivity growth. This suggests that annual wage growth of 2.5 percent should be interpreted as workers telling us that unemployment remains above its natural rate.
Conclusion: By what metric can the economy be characterized as overheating to a degree that necessitates a rate hike?
While the whole article is too extensive to excerpt in its entirety, it focuses on three salient points:
- The diminishing predictive utility of the Phillips Curve since the mid-to-late 1990s.
- The insufficiency of wage growth in driving inflation, even within a Phillips Curve framework.
- Statistical manipulation—akin to methods employed by the Korean administration—wherein part-time labor is categorized as full employment.
I believe that the recent improvement in employment indicators is not indicative of structural labor market improvement or new economic momentum but rather a transient byproduct of the shale gas boom, which is currently in decline.
Warnings of an imminent wave of insolvencies within the American petroleum sector have emerged. The apprehension is that firms, having leveraged extensively to finance shale gas ventures during periods of elevated crude prices, may now face a catastrophic inability to service their debt obligations, potentially culminating in bankruptcy.
According to CNN Money on the 6th (local time), as oil prices remained above $80 per barrel for the past decade, American companies rushed into shale gas development. These entities deployed substantial capital toward the innovation of sophisticated drilling technologies and the acquisition of state-of-the-art extraction machinery.
Consequently, domestic crude production nearly doubled, ascending from 5 million barrels per day in 2008 to 9.5 million barrels by May of the current year. However, oil prices, which once exceeded $100 per barrel, have undergone a precipitous decline and currently languish in the $45 range. The prevailing consensus suggests that a recovery to the $100 threshold remains elusive for the foreseeable future.
The crux of the predicament lies in the fact that shale enterprises procured financing at a juncture when oil was valued at approximately $100. At that time, borrowing was not difficult as the market was overflowing with liquidity due to low interest rates and the burgeoning market for speculative-grade corporate debt. Corporations utilized this low-cost capital to pioneer novel techniques, such as hydraulic fracking, designed to extract petroleum from geologically complex areas where drilling was difficult.
R. Matthew Freund, Chief Investment Officer (CIO) of USAA Investment, observed that while numerous firms lacked substantive experience in shale gas and operated on unrealistic business models, the debt markets offered a frictionless environment for capital procurement.
Yet, as the protracted period of depressed oil prices erodes the economic viability of shale operations, an increasing number of firms are either suspending drilling activities or proceeding with the abandonment of wells. This trend has exacerbated fears that a significant proportion of these enterprises will default on their debt service.
Even should drilling persist, the willingness of financial institutions to roll over existing credit facilities remains profoundly questionable. Generally, banks hedge against downside price volatility when extending credit to oil companies, but these hedging instruments have either expired or are fast approaching maturity. Since re-hedging at current market prices would necessitate the crystallization of significant losses, some banks are negative about the extension of loans.
Walter Zimmerman, chief technical analyst at United-ICAP, remarked that American petroleum firms will be put up for sale at distressed prices to be merged or acquired by competitors, and those that cannot will file for bankruptcy protection.
Jeffrey Gundlach, founder of DoubleLine Capital, also cautioned at a recent bond conference hosted by ETF.com that these developments constitute a dire warning signal, suggesting that “something bad is happening.”
He noted the disconcerting divergence wherein crude oil inventory levels continue to rise despite a deceleration in domestic production. This indicates that the supply glut, which precipitated the plunge in oil prices, remains fundamentally unaddressed. Accordingly, he stated that energy company junk bonds, which were once considered promising assets in the bond market, are now being sold off.
For the shale industry to act as a macroeconomic driver, it would require a market influence comparable to that of Walmart or Microsoft—a proposition few would find credible. It is inconceivable that the sophisticated analysts at the Federal Reserve are unaware of this reality; hence, my consistent assertion that the strong employment figures are a façade.
The Age of the Torporation (2015.10.24.)
Merely two weeks ago, The Economist observed that major corporations are facing deteriorating returns, constrained by the dual pressures of deflation and stagflation.
Did S&P 500 Companies With Higher Global Exposure Report Lower Earnings Growth in Q3? (2015.11.06.)
Furthermore, recent data indicates that S&P 500 companies reported an average decline of 3.7% in operating margins and a 2.2% contraction in earnings per share for the third quarter.
As Chinese manufacturing undergoes a period of consolidation, crude oil prices may establish a floor and begin a gradual ascent, though a sharp spike within the year is improbable. The continued reliance on employment data—the sole remaining statistical momentum, albeit a manipulated one—suggests a clandestine imperative to initiate a rate hike in December.
Reflecting on my experience in political spheres, I have observed that every political act is invariably accompanied by an underlying interest or objective.
Then why is there such a concerted effort to raise rates now? Three potential rationales emerge:
⑴ Pruning Financial Bubbles
→ To preempt a recurrence of the 2008 crisis; the immediate costs of a rate hike are deemed preferable to an eventual systemic collapse.
⑵ Domestic Political Optics
→ To cultivate an image of economic recovery under the incumbent administration, thereby bolstering the Democratic Party ahead of the 2016 presidential election.
⑶ International Strategic Containment
→ To stifle Chinese manufacturing during its period of vulnerability, reinforcing U.S. hegemony and ensuring a unipolar ‘G1’ world order instead of the current ‘G2’ standing.
Nonetheless, I remain skeptical about a rate hike this year.
Crude Oil Hits 52-Week Low Amidst 3-Billion-Barrel Inventory Surplus and Declining U.S. Automotive Sales
2015. 11. 14. 19:54
An Oil-Soaked Globe as Production Keeps Climbing and Demand Falls (2015.11.13.)
The surge in production has led to a global stockpile of three billion barrels of crude, roughly the equivalent of a month of world oil production. The global market has not been this saturated since 2009, when demand for fuel plummeted.
The report helped to decrease the price of West Texas Intermediate, an American benchmark in oil pricing, by more than a dollar at one point on Friday. It almost reached $40 a barrel, its lowest level since last summer and before that in 2009. Oil prices were above $100 a barrel as recently as the summer of 2014.
Behind the low price projections is a sluggish world economy, experts say. The I.E.A. report on Friday suggested that world demand growth for oil would slow in 2016 to 1.2 million barrels a day after reaching a five-year high of 1.8 million barrels a day in 2015.
Low commodity prices and tight financing have forced oil companies in the United States to decommission more than half of their rigs, leading to tens of thousands of layoffs in oil states like Texas, North Dakota and Oklahoma. To keep their leases, and unwilling to pay while drilling rigs already under contract stand idle, many operators are drilling wells without completing them — meaning that as soon as prices begin to revive, they can quickly complete the wells and begin production, thus forcing prices down again.
But not everyone associated with the oil industry is losing these days. As the enormous ships sail in figure eights around the globe, the tanker companies are reaping the rewards, making as much as $70,000 a day, if not more, for their services.
Auto Sales Dip, Hurting Overall Spending (2015.11.13.)
The October results suggest a developing slowdown in consumer spending that could temper expectations of a strong pickup in fourth-quarter economic growth.
Other data on Friday showed a second monthly decline in producer prices as the cost of services fell. Still, the soft inflation and signs of slowing consumer spending are unlikely to deter the Federal Reserve from raising interest rates next month, economists said.
The Commerce Department said retail sales edged up 0.1 percent last month after being unchanged in September and August. Economists had forecast a 0.3 percent increase.
Sales at auto dealerships fell 0.5 percent last month after rising 1.4 percent in September. The decline was surprising because automakers reported strong sales for October. Economists said heavy discounting to attract buyers probably caused the discrepancy. A 0.9 percent drop in the value of sales at service stations, which reflected lower gasoline prices, also helped to restrain retail sales last month.
Retail sales excluding automobiles, gasoline, building materials and food services rose 0.2 percent after a 0.1 percent gain in September. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.
Barclays trimmed its fourth-quarter gross domestic product estimate by one-tenth of a percentage point to a 2.4 percent annual rate. The weak October retail sales also could raise concerns about the holiday shopping season. But economists are optimistic of sturdy consumer spending for the rest of the year, as faster job growth and low inflation increase disposable income.
That view was supported by the University of Michigan’s consumer sentiment index, which rose to 93.1 in early November from 90.0 in October.
The already excessive supply of crude oil, compounded by the sluggish automotive sales, suggests that crude oil prices will fall further.
Financial Markets Decline Following the Paris Terrorist Attacks
2015. 11. 16. 20:08
Markets Stumble as Analysts Warn “Short-Term Shock Is Inevitable” (2015.11.16.)
The KOSPI closed at 1,943.02, marking a 1,53% decline from the preceding trading session, as foreign investors engaged in net sales totaling approximately KRW 235.7 billion. Concurrently, the KOSDAQ concluded at 659.20, representing a 1.69% depreciation. In the Seoul foreign exchange market, the KRW-USD exchange rate appreciated by KRW 10.3 to reach KRW 1,174.1, surpassing the KRW 1,170 threshold for the first time in 42 days. Most Asian equity markets followed suit, with the exceptions of marginal gains in China and India. Kim Yong-gu, a researcher at Samsung Securities, observed, “Approximately half of the KOSPI’s contraction appears attributable to the impact of the terrorist attacks, while the remainder reflects anxieties regarding a U.S. interest rate hike and sluggish export performance.”
Domestic and international experts contend that a transient shock precipitated by large-scale terrorism is inevitable, and they are meticulously monitoring the potential for such instability to become protracted or permeate the real economy. In this respect, the current crisis evokes the repercussions of the September 11 attacks in 2001. At that juncture, the United States experienced negative GDP growth in the third quarter, causing an established 4% growth trajectory to plummet to 1%. Furthermore, the contraction in consumer sentiment led to a global trade reduction of more than 3% within that calendar year.
I fail to perceive any substantive correlation between the terrorist attacks in Paris and the Korean financial markets.
Drawing a parallel between this event and the September 11 attacks is even more absurd. What is the basis for such bullshit?
Market Rebound Commences: KOSPI Recovers 1,970 Level After Touching 1,940
2015. 11. 17. 14:55
Approximately one month ago (2015.10.22), I projected the index would fluctuate between 1,920 and 2,090. Yesterday, the market fell below 1,950 and dropped to the 1,940 level following the Paris attacks—a development that is absurd to characterize as a materially negative factor.
[Afternoon Market Wrap] KOSPI Regains the 1,970 Level as Institutional Buying Flows In (2015.11.17.)
Predictably, a rebound has commenced today. I anticipate the index will continue moving toward 2,090 without significant corrections until the year-end interest rate announcement.
The Federal Reserve Finally Announces a Rate Hike: A Foregone Conclusion, Yet…
2015. 12. 18. 0:27
U.S. Near-Zero Rate Era Ends (2015.12.17.)
The seven-year era of the U.S. “zero-interest rate” has reached its conclusion.
At 2:00 PM on the 16th (local time), Janet Yellen, Chair of the Federal Reserve, announced a 0.25 percentage point increase in the federal funds rate target, raising it from a range of 0–0.25% to 0.25–0.5%. The United States has maintained zero-interest rates since December 2008; this adjustment constitutes the first rate hike since June 2006.
In its statement, the Fed elucidated the rationale behind the hike, noting that “labor market conditions have improved considerably this year” and expressing “reasonable confidence that inflation will rise to its 2 percent objective over the medium term.” Crucially, the committee emphasized that “the stance of monetary policy remains accommodative” following this action. It further noted that “economic conditions will warrant only gradual increases in the federal funds rate,” and that the rate is expected to remain below levels deemed normal in the long run for some time.
“Labor market conditions have improved considerably this year”? “Reasonable confidence”?
Janet Yellen after finally delivering the long-awaited 25bp hike.
Lee Ju-yeol Says, “No Need for Excessive Concern over Fallout from U.S. Rate Hike” (2015.12.17.)
The Bank of Korea Governor Lee Ju-yeol assessed on the 17th that the impact of the U.S. rate hike does not warrant “concerns over negative repercussions on financial markets.”
Meeting with reporters that morning, Governor Lee stated, “Since the U.S. Federal Reserve has strongly signaled a 0.25 percentage point increase, this was an expected move. Given the commitment to a gradual trajectory hereafter, I anticipate the impact on domestic financial markets will be limited.”
He further explained, “The remarks from Chair Yellen were welcomed by the financial markets, and the U.S. markets have stabilized. Thus, I believe we are not in a situation that necessitates anxiety over adverse market impacts.”
Given the persistent discourse surrounding rate hikes and the Fed’s overt commitment to this course—evidenced by its use of tactical statistical artifice since October—this announcement is by no means a surprise.
I have posited in several posts that “a rate hike this year is structurally untenable; if enacted, it would materialize as a marginal adjustment commencing in December. While a hike predicated on nominal distortions such as manipulated employment data is fundamentally unsound, should the U.S. resolve to proceed due to ‘unavoidable circumstances,’ the market will interpret it as a resolution of uncertainty. Therefore, a December rate decision constitutes a short-term catalyst."
After dragging it out since September, the Fed finally delivered a 0.25% hike today. Furthermore, by adopting a dovish tone, it aligned itself with market expectations (or, more accurately, provided the requisite fodder for financial institutions to engage in speculative maneuvers). Consequently, the Dow Jones, NASDAQ, KOSPI, and KOSDAQ all rose.
While the media sensationalizes the “12 consecutive days of foreign capital outflow,” a closer inspection reveals a different dynamic: over the past two months, institutional and foreign investors have been taking turns beating up retail investors and driving prices down, and since late November, foreign investors have been offloading shares to domestic institutions.
The KOSPI continues to adhere to the trajectory I delineated in October—fluctuating within the 1,920 to 2,090 corridor—and the developments over the ensuing fortnight remain a matter of keen interest. Should the index surpass the 2,000 threshold today, the path toward 2,120 is arguably open. However, it remains uncertain whether foreign and institutional investors will continue liquidating retail positions for another week or simply let the Santa rally begin, especially as retail investors will likely surge into the market following the resolution of uncertainty.
I am wagering on two outcomes: (1) the final liquidation of the remaining retail positions by next Friday, and (2) a subsequent retreat below the 1,900 level as disappointment selling ensues following a failure to break through the 2,100 resistance level.
However, several indicators underpinning the real economy had yet to show a clear recovery, and with the exchange rate still unstable—especially as the Chinese yuan began weakening again even after its inclusion in the SDR basket—one has to wonder whether the start of U.S. rate hikes could really produce a favorable outcome. Or are we going to get hit by another surprise devaluation shock from China?
If the KOSPI fails to break through 2,100, it would probably be better to get out and run.
Summary: Brief Thoughts on the Impact of a Rate Hike on the KOSPI
With the “uncertainty of a rate hike” now eliminated, the market ought to go up. If that uncertainty has been resolved and yet the KOSPI still fails to break firmly above 2,100 and hold there, then market perdition will unfold sometime in 1Q next year—or, if delayed, by 2Q at the latest—a timeframe I have consistently projected throughout this year.
It appears that the KOSPI will fail to break through, so I am staying on the sidelines and getting ready to run.