Wednesday, November 12, 2008

The Korean Won’s Current Woes

The Korean Won’s Current Woes
(Never made through the pipeline in April)

NINJA (no income and no job) mortgages and The Economist’s perpetual warnings regarding the US housing market bubble for the last five years are well served by an anonymous Korean investment manager who told me a few weeks ago, “We don’t need any more forecasts.” There is blood in the streets. The website suggested nearly 25% of US mortgages could turn into “jingle mail” where owners send the keys in for foreclosure because paying a mortgage on a house that is worth considerably less than its mortgaged amount is not a good investment. Some owners would prefer bankruptcy to pay rolling US banks’ risky and speculative losses on the housing market.

At the same time it is very difficult to separate Korean economics from the current US economic quagmire. Korea ’s exports depend on commodities pricing in oil, iron ore and steel and are more expensive to make and ship abroad because of what is happening to S.S. America at this time. Consumers appear to be tightening their belts. This means they are buying fewer new cars and household goods stamped Hyundai, Samsung or LG. Koreans are locally fixing prices on a number of staple items in a sort of national battening down of the hatches in the event of rising inflation or “stagflation” where the won valuation may continue to fall but prices keep rising.

In “The Lexus and the Olive Tree” Thomas Friedman warned that the future of economic crises in the globalized world is perpetually the fault of issuing bad loans to bad borrowers. Further he noted due to increased economic interconnectedness one should be prepared for more frequent global economic crises. Does that mean a bottom can be painted on current US dollar values which affect the Korean won so heavily? For some weeks now the US Federal Reserve has been attempting to do that. Is there a global recession at this time? We may observe the US dollar and Korean won exchange has displayed recessionary-type indicators lately for reasons relating to how interconnected the US economy is with Korea and most of the globe. Jay and Gar, Canadians living in Daegu wrote that they were quite worried about these current exchange rates and are there any recommendations to be made considering wiring money home? Well, unless you are paying off debts at home you might consider keeping it here in a term deposit hovering around 5% annually depending on your bank and also however long you plan to stay here. The more US dollars or foreign currency you purchase the lower the value the Korean won is pushed. Conversely the more Korean won you refuse to sell in exchange the higher the value the won may rise.

Even the longest recessionary cycles in recent times since 1945 have not exceeded 10 months and since 1919 (including The Great Depression) this average period increases to 14 months. My best buddy (a wild and crazy day trader) suggests that the current exchange rates may also be impacted by dividend season at Korean stock exchanges with foreign investors converting their gains to US dollars. Thus some of the current rates may be part of a periodic annual event at this time of year which coincides with the US sub-prime correction. So depending on your time in country you might like to locally invest in the interest of waiting out the current exchange rates. However, if you have an investor’s mindset already, you might also paradoxically seek to purchase US dollars in the hopes that they may rise again sometime in the next year and a half. J.P. Morgan said, "Any man who is a bear on the future of this country will go broke." Buy low sell high? Have we reached the bottom yet? Let us hope this also applies to the Korean won’s current woes.

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