South Korea is one of the largest economies in the world with a $1.5 trillion GDP. In the last 3 decades, the South Korea’s economy has grown very fast compared to other Asian countries. This is largely because they have a well mixed economy that is largely made up of family owned businesses. However, the economic wind seems to have shifted directions and the whole economy is has been slowing. The financial sector is also being crippled by the current panic in the global stock market. The recent six years economic numbers shows that the economy is at a six year low. Global companies like Hyundai and Samsung that are based in South Korea, have begun losing their grip in the global economy and things are getting worse every passing day.
It is just a few weeks ago when the stock market was making new highs and no one knew that something uncertain might happen. Right now the whole global economy is shaking and it seems that the crash that has been predicted for years is finally here with us and the South Korean economy doesn’t look good either. South Korea might trigger a tsunami of volatility and this can lead to a further drop in the stock market beyond the level we are now.
Economists have been pointing out big problems in the South Korean financial industry which is already filled by financial instruments like autocallables that are very volatile and can easily cause a financial crisis. Autocallables are fundamentally structured financial products that are very common in South Korea and are often thought of as a service. The banks offer to sell insurance on the stock market on your behalf and in return you get an income from the received premiums. The bank will tell investors the amount of return they can expect; for example one can get a 5 percent return as long as the S&P 500 does not plummet below 2000. However, there are sometimes when this doesn’t work like in February 2018 when we the VIX liquidated three times faster. The market dropped so fast and this panic and local banks in South Korea flooded clients with margin calls. This prompted a forced liquidation of assets which are considered to be risky and this triggered a cascade of continued selling not just in South Korea but globally because the most of the assets that have collateralized the autocallables are not domestic. Because of this, any instability in the global markets prompts an autocallables sell off and if not handled well this panic sell can cause a liquidity problem resulting to a bigger crash in the markets.
We are now experiencing this sell off scenario because the US markets have suffered the worst sell off since the black Monday in 1987 and the South Korea’s Kospi has already entered into a bear market. Furthermore, the Kospi has broken bellow the 200-month average near the 1750 level which had acted as a support since the 2008 global financial crisis. This drop is so big to a point where the banks in South Korea are discussing the need for a special meeting dedicated to discuss appropriate steps they will take to stabilize the markets. If the current stock market crash continues, this might be the beginning of pain for both the institutional and retail investors because of these huge margin calls. Things will get worse when the long awaited autocallables gets liquidated and this will initiate a big liquidation wave that can rattle the global stock market resulting even in a deadlier selling avalanche.
In a recent publication, Horseman’s Resurgent CIO, Russell Clarke warned that the South Korea’s insurance industry is already in a big trouble. This fund has been the world’s most bear fund and right now they have amassed a 20 percent return because of the current market selloff and they are warning that things will get worse when the autocallables gets liquidated. Historically, the South Korea’s KOSPI 200 is always volatile because of the prolonged bull market in semiconductors. In addition to this, we have had a volatile selling that has made the collapse of the KOSPI 200 volatility and recently we have broken past the 2011 implied volatility levels. Despite this historic reduction in volatility, the number of autocallables being issued has not dropped. In 2015, the insurance industry in South Korea was about to collapse when the HSCEI based autocallables were knocked down and many investors took advantage of the volatility to make higher yields. Autocallables that are issued in often include the Euro Stoxx 40 and other global indexes that are performing poorly right now because of the current crash in the markets. It might be a matter of time before we see a massive autocallables selloff and this might turn out to be the bomb that the markets have been waiting to crush further.
The recent global panic and slowdown, have contributed to the shrinkage of South Korea’s economy. The country has also been in a trade war with Japan and we are yet to see a satisfactory trade agreement between these two countries. This of course has weakened the economy further because companies that have been exporting their products to Japan have been hit by the current trade disputes. Domestically, the economic condition is not good either because consumption and investment has been slowing down in the first quarter of 2020 largely due to this global panic. Economists are predicting that the performance of financial institutions will fall by about 1.9 percent. Meanwhile, the South Korea’s export sector has experienced a 10 months consecutive decline and this shrinkage will continue to a foreseeable future. This is not good for South Korea’s economy because its GDP relies a lot on exports. The consumer consumption in South Korea has also hit a record-low and the consumer price index is falling at a very high rate.
It is shocking to realize that analysts are expecting the economic growth in South Korea to be below 2 percent in this year. Because of this slowdown, the OECD and the International Monetary Fund (IMF) are recommending a financial stimulus to try and boost the economy. The South Korea’s government is also under pressure to come up with more fiscal stimulus because the economic growth has dropped to record lows seen only in the 2008 financial meltdown. The decline in external demand of products from South Korea because of the current decline in international trade has also worsened the economic condition. Right now the global supply chains are experiencing the biggest disruption in history and this is harming the economy. Exports have drastically dropped and as a result, the manufacturing sector has experienced a big decline.
As the whole global economy goes through a lot of turmoil, in the United States the Federal Reserve has already begun cutting interest rates as a way of stimulating economic growth. The same will also have to happen in South Korea and it might be a matter of time before the central bank begins initiating some measures to help the economy. The whole economy is waiting to see the action that the central banks will take and maybe we will see a further reduction in interest rates. According to economists, interest rate cuts will help the South Korea’s economy but this action will not solve most of the underlying challenges like trade wars with Japan.
South Korea also has a big aging population and if the current demographic trend doesn’t change and the economy will face more troubles as result. In 2020, the economic outlook does not look good because investment rates are dropping while exports are plummeting at the same time. This is happening in South Korea at a time when the whole world is facing many economic challenges especially due to the recent disruption in supply chains. The recent decision by Japan to reduce the number of imports from South Korea has turned out to be a big threat to the well being of the economy. On the other hand, President Trump is desperately trying to win when it comes to international trade. Because of this, a trade war has already begun between China and the United Sates. Washington has already imposed billions of dollars in tariffs to the Chinese and European goods. Who knows if South Korea is not the next victim? All this is affecting the stability of the global economy and soon we might find ourselves in a historic economic meltdown. What we are seeing now in the stock market is just the beginning!
Right now the global economy is at the verge of collapsing but South Koreas seem to be ahead of everyone. The economic meltdown in South Korea has already begun and right now we have hundreds of companies that are having financial trouble because of the current slowdown in exports. The financial sector in South Korea is also troubled because of the recent crash in the global stock market. It is very clear that the troubles being experienced in South Korea’s financial system will trigger even a bigger market crash than what has already occurred. When the autocallables selloff starts in South Korea, the stock market will be shaken further. This will cause a panic sell where investors will try to close their positions before there is a further downside move. The whole global stock market now is at a big risk of crashing further and the government must come up with aggressive measures to save the stock market because we have already entered into a bear territory.
For the last 10 years, we have had a booming global economy. Currently, we have a global panic and this economic growth looks as if it is coming to an end. The party is finally over! Globally, we are facing a very big economic downturn and we have reached to a point where everything has begun falling apart. The economy has come to an abrupt halt as supply chains break and anxiety spread all over. Millions of businesses have been impacted by the supply chains disruptions and this has triggered the biggest economic meltdown since the 2008 global financial crisis.
For the last two weeks the US stock market has been tanking all across the board. It looks as if a major stock market crash is upon the United States. The Dow Jones Industrial Average has been swinging approximately for 1,000 points in multiple days within the last two weeks. The stock market traders have been panicking because the market has just turned out to be a rollercoaster that they have not seen for many years. The market has been very volatile with up to 4.5 percent movements in a day and all investors are unaware of what will happen next. There is a lot of panic as investors fear that the market will continue tanking because economic indicators are indicating that a big stock market crash will happen. The recent interest rate cut by the Federal Reserve has not done any good to the market.
The financial markets are having the worst performance since the 2008 financial crisis. The S&P has the worst performance in a decade and now it is already down 5 percent. The Europe 600 index has dropped by 5.9 percent while the MSCI Asia Pacific Index sank by 4.1 percent. This is even worse than the 2010 flash crash because we never had such a big drop and the question is what will happen next to the stock market. Will we see a bounce or will the markets continue plummeting.
The US economy has been slowing down and economists are predicting that a major economic collapse is coming. In a recent interview, Guggenheim’s Global CIO Scott Minerd said that the cognitive dissonance in the stock market is stunning as reflected by the ever rising prices and credit spreads. He expressed that this is not a buy the dip market but don’t try to catch a falling knife markets because prices have been plummeting for weeks. The stock market collapse has already begun!
Will the Chinese economic collapse happen in 2020? China is the second largest economy in the world and in the last two decades, China has experienced a significant economic growth. However, the China has many problems like enormous debts, bank runs, an aging population and many others. The growth in China has been fuelled by debts and poor policies and this has created a hyper bubble that will burst with a china’s yuan crash. People are always asking when the economic collapse will happen in China. For the last several years, we have seen several Chinese banks being shut down. Banks like Baoshang, Jinzhou and other banks have been shut within a very short time. These are some of the cases of bank collapse in China and economists are predicting more similar cases in days to come.
Ever since the last stock market crash, unprecedented intervention by the us Government’s Bank has helped the financial system relatively stable. No matter what happened the Fed always solved the problem but they created the biggest stock market bubble in U.S history. Now they facing with the biggest challenge and it looks like they can do nothing to avoid the next financial crisis. They try to solve the problem with the same old way that worked well in the past and on Tuesday they announced an emergency rate cut and instead of rising the stock market started to crash.
Germany is the largest economy in Europe and it has been very pivotal to the success of the European Union. However, the German economic situation is taking a new shape as data being released is showing slowdown. The economy has been flopping for months and the manufacturing sector has been declining steadily and a big recession might be around the corner. According to the economists, the German economy has been faltering and the current instability in the global markets is just adding more owes to the economy.