—Lastly, securities news and today’s stock market.
Three weeks after the Fed announced its giant step, the won-dollar exchange rate closed at 1,210 won. At one point during the session, it broke below the 1,200-won line, spreading hopes in the market for a weaker dollar.
Concerns over a strong dollar—that the dollar could break past 2,000 won due to the Korea-U.S. interest rate inversion—seem to be gradually losing strength.
Despite high U.S. interest rates, the weak-dollar trend continues in the market because of America’s still-unstable inflation.
Harvard Professor Kevin, an authoritative American economist, expressed strong concern, saying, “Next month’s U.S. CPI may exceed 9%.”
Professor Kevin specifically cited still-hot employment indicators, instability in raw material supply and demand, and distrust toward the Fed, sharply criticizing that “the Fed’s giant step last month will also end in failure.”
In fact, just as Professor Kevin analyzed, every indicator in the United States is unstable.
Adding up the price indices announced weekly by the U.S. Department of Labor, next month’s CPI is tentatively estimated to be 7.5%. This is a figure far above the Fed’s expectations, and it also means the giant step had no effect whatsoever.
On this day, Professor Kevin diagnosed, “The Fed’s repeated failures in response may instead lead to distrust in the U.S. stock market,” adding, “If inflation is not brought under control within two or three months, even the Nasdaq and S&P, which have been holding firm, could collapse.”
This means that the current U.S. benchmark rate of 3.25% must be raised to at least over 4% to control inflation. With concerns over mortgages pouring in, the Fed’s choice does not look easy.
Accordingly, many experts forecast that confusion in the U.S. market will be inevitable for some time.
As if that weren’t enough.
The raw materials market is also in turmoil due to supply instability.
As inflation concerns persisted, global raw material prices such as crude oil, steel, nickel, copper, and grains surged sharply. With many companies having gone bankrupt during COVID, current companies are unable to handle the sudden increase in global demand.
Hot employment indicators, inflation that cannot be tamed, soaring raw material prices... Amid this triple hardship, attention is focused on what decision the Fed will make.
However, as of today, gold prices have recorded a decline for three consecutive weeks.
For more details...
*
Monday morning, 9 a.m.
The Overseas Equities Office gathered in the conference room with heavy faces.
As inflation concerns originating from the United States continued recently, even the pension fund employees had lost their smiles. It was enough to make one miss the COVID era, when anything you bought simply went up.
“Each team. Report.”
When Chief Oh gestured, all the senior staff stood up.
At present, our Overseas Equities Office was carrying out a secret operation.
Uncharacteristically for a pension fund, we were considering investing in risky assets.
After receiving 500 billion won in operation funds from the Director, Chief Oh ordered us to grasp raw material trends in detail. And today was the day each person had to present the supply and demand status of the raw materials they were in charge of.
“Yes. Our team investigated supply and demand for copper, steel, nickel, and the like.”
What a shame. Investment really did seem to be all about timing.
The very day we received full authority from the Director. If we had immediately proceeded with the purchase, we would have made at least 10% in profit... While we were deliberating, raw material prices had soared.
“Yes. Our team investigated supply and demand with a focus on food raw materials such as wheat, rice, and corn.”
The raw material supply and demand status presented by the fund managers was not much different from what the news had been blaring about.
Unsettling. Everything was simply unsettling.
Foodstuffs such as wheat, rice, and corn, of course. Industrial raw materials such as copper, steel, and nickel were also flashing red.
The reason the global community had suddenly faced a supply shortage was the aftereffects of COVID. In truth, this was not a problem limited to raw materials.
Just six months ago. Wedding halls were busy going bankrupt one after another, but now newlyweds could not get married because there were no venues. The social restructuring forcibly carried out during COVID was producing side effects in real time.
With such problems appearing across all industries, it was nothing short of a great disaster.
“Good. That’s enough.”
When the presentations ended, Chief Oh sank into thought.
“So the point is that supply ultimately can’t keep up? Because companies went bankrupt one after another during COVID?”
“Yes, that’s correct.”
With the supply chain smashed and demand suddenly exploding, raw material prices had no choice but to rise in this market environment.
“But we have to approach this carefully. Just because supply and demand are unstable right now doesn’t mean raw materials will keep rising in price forever.”
“Yes. That is correct.”
“Each team, separate the wheat from the chaff and pick out the items whose supply instability seems likely to last. Let’s choose and focus.”
“Yes, yes.”
“Does anyone have a different opinion?”
When Chief Oh finished giving instructions, Team Leader Choi Gukhan carefully raised his hand.
“Yes, Team Leader Choi.”
“Chief, I think this may be a little dangerous.”
“Dangerous?”
“To be honest, has there ever been a time in the last twenty years when raw material prices weren’t unstable?”
He raised his voice.
“If things had gone as economists said twenty years ago, oil should have been depleted by now. But with shale gas as an alternative, crude oil prices actually became cheaper.”
“Hmm...”
“It’s been the same with raw materials. Whenever prices seemed like they might rise, better technology or substitutes were discovered and prevented price increases.”
“Team Leader Choi, are you opposed to purchasing raw materials?”
“To be honest, I don’t think it fits the pension fund’s investment philosophy. Raw material investments are mostly only futures and options. In market conditions where we can’t even see an inch ahead, high-risk products seem likely to invite disaster.”
In fact, there was a reason the pension fund had not touched raw materials until now.
The pension fund preferred lazy investments. Assets that trended upward, where you bought them and sat still, and someday they would rise.
Products like raw materials, which required real-time market analysis and carried high risk on top of that, were not what the pension fund wanted.
“Chief... To be honest, I think the same. With raw materials, demand and supply forecasts change like offense and defense switching in a soccer match.”
“If we invest just because the supply chain is unstable right now... news suddenly comes out saying a massive amount of iron ore was discovered in some mountain, or a nickel jackpot was found in the sea. It’s too dangerous.”
Chief Oh nodded.
“That’s a reasonable point. That was why the Director hesitated until the very end as well. I may have received full authority, but if the market is truly impossible to predict, I’ll call it off. What do the rest of you think?”
No one raised a hand.
Since no one raised a hand, Chief Oh’s gaze turned toward me.
“Assistant Manager Lee, you look like you’ve got plenty to say. Just speak freely. I hate it when people pull rank while talking about money.”
Encouraged by those words, I answered without hesitation.
“We have to invest. Of course, the points raised are entirely reasonable. Raw materials are not products that steadily trend upward. Therefore, we need to construct the portfolio not with long-term instruments, but with short- to mid-term ones.”
“You know raw material futures and options are investment products on the level of gambling, right?”
“At a time when the Fed is once again toying with the interest rate hike card, there are no safe investments. U.S. bonds are medium-risk products too.”
“When the market is unstable, holding cash can also be an investment. Not losing money is making money.”
“Among best, middling, and worst strategies, I’d consider that a middling one. And a middling one closer to worst...”
“What? Not losing money is a middling strategy? And one closer to the worst?”
Had I spoken too much as if rank really didn’t matter? Chief Oh let out a hollow laugh as if dumbfounded.
“What’s the reason?”
“Because our portfolio has already finished diversifying risk. If you look at the pension fund’s current portfolio, 99% of assets are concentrated in bonds, the KOSPI, the Nasdaq, deposits, and so on.”
“Thanks to that prudence, our returns ranked first during the subprime crisis.”
“Yes, but in return, our returns after the subprime crisis ranked last among sovereign wealth funds.”
The pension fund had weathered the subprime crisis in the most exemplary fashion, but it had been the slowest to recover.
Other sovereign wealth funds quickly made up their losses with double-digit returns once the downturn receded, but we only marked time in place.
Many experts criticized this as “marching while wearing a gas mask.” If biochemical weapons suddenly go off nearby, the one wearing a gas mask survives. But if you always walk around wearing it, how far can you march?
What mattered was the crisis-response ability to detect signs in advance and take out the gas mask only when necessary.
Consistently switching between safe assets and risky assets according to market conditions was, in effect, the real skill of fund managers.
“With inflation so clearly expected, raw material prices have no reason to settle down easily. There is also clear evidence that the global supply chain has collapsed. Even so, clinging to safe assets—wouldn’t that be the worst strategy?”
Part of this was because I had glimpsed destiny, but it also contained my personal investment philosophy.
When inflation erupts, all economies ultimately return to a barter economy.
In economics, money is taught as a tangible asset, but how is that tangible in any way? It’s a scrap of paper. When the value of currency falls, the era of real tangible assets like steel, rice, and crude oil begins.
So was there any reason not to buy?
“...”
“...”
When my explanation ended, Team Leader Choi, who had hesitated until the end, smiled bitterly.
“Team Leader Choi, do you have a different thought on this?”
“Well... I can’t agree with all of it, but this time, Assistant Manager Lee’s argument does seem persuasive.”
“What about the others?”
“...If we approach with short-term instruments, I’m in favor as well. Raw material prices don’t seem likely to settle down easily.”
At that moment, Team Leader Choi continued.
“But Chief. I still cannot agree to purchasing gold.”
Team Leader Choi looked at me.
“Assistant Manager Lee, no matter how I look at it, the gold purchase report isn’t persuasive. During the zero-interest-rate period, it already rose nearly threefold. Other raw materials may be one thing, but gold has risen far too much.”
“That’s right. Gold has risen too much, so it’s currently in a bear market.”
“I agree. Other raw materials may be necessities, but gold isn’t that kind of raw material, is it?”
Was it because it had already risen threefold? Or because gold was currently in a bear market?
The purchase of gold, which I had put at a 70% weight among raw materials, faced fierce opposition.
“And this doesn’t fit economic logic either. Isn’t it common sense that when interest rates rise, gold prices fall? You predict U.S. rates will rise further, so why did you set such a high weight for gold, which has no choice but to fall?”
For a moment, I was at a loss.
The price of gold was an area even great scholars of economics could not explain... Objectively speaking, compared to its price, it was a truly useless rock.
It was neither a core industrial material nor an essential industrial material, and you couldn’t eat it either.
It had maintained its price until now for one reason alone: throughout human history, it had always been a safe asset.
“...Gold needs to be approached from a different perspective.”
Therefore, gold prices had to be approached from an area other than supply and demand.
Namely, the fear index.
“What on earth is that perspective? Gold prices rise even during high interest rates? What kind of new normal is that?”
“If you approach it theoretically, it sounds absurd, but if you approach it through the fear index, it can be explained. Fear of inflation will overcome fear of high interest rates...”
“Assistant Manager Lee, isn’t that too much in the realm of intuition?”
“Listening to the explanation, it sounds even riskier than raw materials.”
Damn it. I had clearly seen it from the future, but there was no way to explain gold.
Fear of inflation would overcome fear of high interest rates... But I had no objective indicator I could present for that.
“Enough. I’ll decide that issue. Just purchase it in stages.”
At Chief Oh’s order, everyone jumped in alarm.
“B-but Chief!”
“Not every economy in this world runs on indicators with evidence behind them. Sometimes intuition is important too.”
“But gold has already tripled...”
“U.S. interest rates have risen sevenfold, and yet inflation hasn’t been caught. Was there anyone who predicted that?”
“...”
“I’ll take responsibility. Execute the gold purchase before the CPI announcement and watch the trend. Each team is to monitor the other raw materials by the hour.”
Fortunately, Chief Oh also seemed to foresee that fear of inflation would overcome fear of high interest rates.