Opinions and observations expressed on this blog reflect the authors' individual experiences and should not be construed to be financial advice. None of the members of this blog are licensed financial advisors. Please consult your own licensed financial advisor if you wish to act on any recommendations here.

Sunday, May 30, 2010

Bury Your Money Like Kimchi!

We've touched on South Korea here already recently, but I wanted to come back after some reading I happened upon. Here on the downside of that bull market peak in the beginning of this year, it appears that market recovery may not be as quick as once predicted. This is not unusual, as the recoveries from 1929 and 1980 sputtered and fell several times before more stable growth trends took hold. The Star Tribune from this morning, from a Wall Street Journal article that I have since been unable to locate, theorized that the real value of the market may be as low as 50% of where we are hovering now. We could continue to see short bull markets, but I'm thinking that an overall downward trend may continue for sometime now.

That being said, the New York Times postulates that the uncertainty in the Korean peninsula is not particularly so. Kim Jong Il is an unwell man, but the Korean memory is a long one, and avoiding military conflict is likely to be the ultimate goal here. Kim is the crack baby misbehaving for attention.

So, between the Event Risk and uncertainty of the professionals in the face of it, and the (potentially totally wrong) prediction that the market will continue to roll downward, and the overall terrific environment South Korea has been and will continue to be as its vast rural population enters the modern world, I think we should be on the lookout of Korean opportunity.

Is this a fair follow-up to BQ's first post on Korea?


  1. On the issue of valuation, it is possible, emphasis on "possible", that investors simply will not pay the multiples that they have for the past twenty years and that stocks enter a sustained funk. However, I remain unconvinced of that argument at this point for the simple reason that, compared to any likely yield on treasuries, equity valuations look attractive provided that the economic recovery remains intact.

    Part of the reason that there is such broad disagreement about valuation is precisely what I indicated in a previous post: There is not even a common agreed upon measurement. Even if there was a common measurement, there is certainly not a common standard for what constitutes fairly valued and what constitutes overvalued. As such, I have routinely seen columns that appear to justify dramatically lower valuations for the equity markets. However, any comparisons to the period of '66-'82 have one serious problem with them: interest rates are far lower now. When long term interest rates were frequently in the 6-12% range, equity valuations should have been between PEs of 8 and 16. When you look back at it, that's actually about what happened. Now, with interest rates probably in a 3.5% to 5.5% range for some time, present valuations look quite reasonable. If your assumption is that interest rates will rise to 7% or so, then stocks do look overvalued and you should probably put your money in short term treasuries.

    Long story short, I generally think the S&P 500 will be closer to 1,700 five years from now than to 700. If we have an economic relapse, we'll still probably be closer to 1,300 than to 700.

    That being said, it is entirely possible that the U.S. is not the best location for investment. If indeed this Korea situation completely fizzles out, which is the most likely outcome, Korean investments do look quite attractive relative to the U.S. over the next several years. That is unless China suffers a financial crisis related to its bloated property markets. If that happens, Korean exports may suffer badly and, unlike the U.S., Korea is absolutely dependent on exports for economic growth. Just one more thing to keep an eye on with Korea. They will live and die by China going forward to a great extent so that situation demands attention.

  2. By the way, I've been terribly wrong before on these things. I absolutely did not see the total rout that occurred in 2008 coming. I will say that I called the real estate bubble's burst somewhat decently, but I didn't appreciate the far ranging implications of that until it was too late.

    I hope that establishes that I am no great authority on calling inflection points or projecting the future.

  3. Still, your input is most valued.