Black swan or wake-up call

Kim Dong-ho
The author is an editorial writer of the JoongAng Ilbo.

Black Monday on Wall Street was bound to arrive at anytime. Alarms of the burst were sounding for some. The price-to-earnings ratio, or P/E, yawned as the gap between stagnant corporate income and skyrocketing stock prices grew wider. The value of U.S. stocks averaged 19 to 20 times their net corporate earnings per share.

Overheated stocks inevitably had to explode as in the IT bubble burst of 2000. The latest overheating is concentrated on household tech names like Google and Amazon, while traditional names have stayed stagnant. The IT stocks trade 35 to 40 times their earnings per share. Their market cap now far exceeds the U.S. GDP.

The global economic recovery had been mostly financed by cheap capital and debt. Korea’s scoreboard is more pitiful. Except for semiconductors, earnings from the manufacturing and service sectors have been skidding over the last four to five years. The new coronavirus hit the overheated stock as a black swan. The stock market lost ground at the external shock because its fundamentals have been weak.

Amid a steep fall in global stock prices from the rapid Covid-19 spread, the Kospi plunged to 1,954.77 on Monday, a 4.19 percentage decline from the previous day. The Korean won also fell to 1204.20 won per dollar. [NEWS1]

Black Monday in stock markets around the world is a result of excessive speculation. Traders mouth only two words — “Buy” or “Sell.” “Goodbye’” is taboo. As they always try to find the upside, they don’t want skepticism to ruin the bull run. Former Goldman Sachs CEO Lloyd Blankfein predicted a “quick recovery when the health threat recedes.”

But wishful thinking cannot hide the poor state of the global economy. Moreover, Korea should be more vigilant than ever. The global economy battered with debt has been forced to continue with negative interest rates as all heads of state vowed to revive their economies. Deficit-financed government stimuli helped boost stock and real estate prices — overly. The Covid-19 novel coronavirus was only part of the problem. What pulled the trigger was the crash in oil prices amid sluggish demand. Oil-producing nations struggling with heavy debt and fiscal woes refused to cut their output. Their beggar-thy-neighbor overproduction brought about a collapse.

Oil prices were never high when the global economy did poorly. Demand fell after the virus scare aggravated fragile economic conditions. Surviving on its status of the world’s third largest oil producer, Russia could not accept its biggest rival Saudi Arabia’s demand for an output cut. Oil has emerged as the life line for Russia at a time when even the United States and Japan can hardly afford more fiscal deficits. Oil could be arguably the most accurate barometer for the global economy.

An economic crisis has been arriving every 10 years. Big or small, it revisits, as seen in the oil shock in the 1970s and the southern European fiscal crisis in 2010. In the meantime, a currency or financial crisis took place nearly every 10 years. The Black Monday also landed when many experts warned of a crisis in 2020. As greed has bred the overheated economy, the world may have to pay the price.

An economic shock usually lasts for two to three months. The Korean stock market rebounded on Tuesday after the U.S. government vowed extra stimuli. But it is too early to let down the guard. Fear often overwhelms reality as we witnessed during the 1997 Asian financial crisis and the 2007-08 global financial meltdown. If the virus rampage and the new oil shock do not subside, the stock market will remain volatile.
Yet there is a silver lining. The United States and Korea are different from 2008. Innovation continues in the United States, led by platform-based economy. Korea’s foreign reserves are solid. Black Monday could be the last warning for Korea to fix its weak fundamentals.