The cruelest rally

Lee Chul-ho
The author is a columnist of the JoongAng Ilbo.

Stock rallies usually send an upbeat vibe. The markets await a summer rally ahead of the vacation season and a Santa rally before Christmas. But the bull run in the U.S. stock market has been labeled the saddest and cruelest rally so far this year, as well as history’s most hated. The richest 10 percent who can afford overpriced stocks and funds celebrate the benefits of the super rallies driven by lush liquidity, while the remaining 90 percent are pained by social restrictions and lockdowns due to the coronavirus that has been causing the worst depression in modern times.

Hedge funds are gobbling up stocks as they bet high on the colossal liquidity unleashed to fight the virus battle. The toll on the U.S. economy is estimated at $3.7 trillion. The U.S. Federal Reserve and administration have poured out $12 trillion. The excess would inflate asset values. Stimuli campaigns against the 2008 financial crisis had some restraint due to the political pressure of bailing out financial institutions blamed for the subprime mortgage crisis and financial meltdown. But the U.S. legislative brake does not work this year against the merciless coronavirus outbreak and presidential election. Stimuli addiction has sunk in deeply.

Korea too has been on a spending spree. The government has pumped out 140 trillion won ($120 billion) over the past six months since the Covid-19 outbreak. Instead of aiding domestic demand such as consumption and investment, the money has only fueled asset inflation. Apartment prices in Seoul have gone up 45 percent since the Moon Jae-in administration came into office in 2017. Individuals are flooding into the stock market with borrowed money.

But the ample liquidity has not reached most of the self-employed and small merchants whose businesses have been wrecked by social distancing measures. Loans to wholesale and retail, hospitality and eatery businesses hit an all-time high of 18.8 trillion won in the second quarter. They are sustaining businesses more or less with debt. The extreme distortion in cash distribution has caused a liquidity flood in restricted areas and drought in all other places.

The capital market has become dysfunctional. Its capacity to filter out marketable products has been ruined by heedless financial easing from governments and central banks around the world. Money has turned selective and speculative amid uncertainties. A liquidity trap is being feared as the currency circulation rate has fallen to record low levels. Japan has finally escaped the liquidity trap through sub-zero interest rates and radical monetary increase. South Korea cannot choose such extreme steps due to the risk of foreign capital flight and downgrade in sovereign credit rating. Korean markets lost 19.7 trillion in foreign capital when rates fell below the U.S.’s two years after August 2005.

Stimuli must inevitably go on as long as people are pained by the coronavirus crisis. Only two factors can stop the spending binge. One is the commercialization of a vaccine and cure for Covid-19. International Monetary Fund Managing Director Kristalina Georgieva predicted that a full recovery from the global downturn hinges on a medical solution like a vaccine rather than financial and fiscal actions.

A steep increase in interest rates in the U.S. that prints out global reserve greenbacks can rock global markets. Latin American countries faced a liquidity crisis when U.S. rates jumped 3 percentage points from 1994. The perils reached the Asian continent two years later. The rate spike in 2004 under Fed Chair Alan Greenspan best exemplified an asymmetric, or uneven, monetary policy-making. The Fed raised interest rates from the reflection that excessively lowering interest rates to battle with the ruins of the dotcom bubble burst had fanned inflation and housing prices. But the tightening ended up causing a bigger catastrophe — the subprime mortgage crisis.

The pandemic crisis has pushed the Korean economy into perilous waters that have never been experienced. It has hit hard first on the weakest — the hospitality and eatery sector and young and female irregular workers. Yet housing and stock prices enjoy a heyday. Fed Chair Jerome Powell warned that a recovery won’t be as fast as expected, ruining many companies.

Fiscal and monetary stimuli must become more fine-tuned to help the weakest. Handing out relief funds or subsidizing mobile phone bills for every citizen is a luxury we cannot afford. The crisis won’t end unless a cure and vaccine arrives. Until then, the government will have to watch its weapons carefully.