Stock market bubble loan awakened by Kim Hyun-suk’s Wall Street Now Musk tweet

On the 11th (U.S. local time), the New York Stock Market showed a slight decline. The Dow fell 0.29%, the S&P 500 fell 0.66%, and the Nasdaq 1.25%. Tesla’s share price plunged 7.82%, which had risen for the 11th consecutive day, while Bitcoin, which once exceeded $40,000, plunged to as low as $30,000.

Political noise, such as the Democratic Party’s impeachment of Trump, with less than 10 days left in office, also had an impact, but it was basically attributable to higher stock market valuations and a sense of vigilance due to rising interest rates.

Warnings about the stock bubble are getting stronger. One tweet by Elon Musk awakened investors. Musk posted a message on Twitter on the 7th, saying, “Use Signal.” This meant to use a privacy-protected messenger app signal in response to changes in the privacy policy of Facebook (Messenger). But investors flocked to a company called’Signal Advance’, which is traded over the counter. The stock, which traded for $0.6 just before Musk’s tweet, ended at $38.7 that day. It has risen more than 50 times in a few days.
(Related article www.hankyung.com/finance/article/202101105527i)

It shows how much money is currently overflowing on the stock market with the Bitcoin surge and investors are speculating.

Interest rate movements are grim. On this day, the 10-year Treasury bond yield (interest rate) in the New York bond market rose to 1.145% per year during the intraday. This year, it has already increased by more than 20bp (1bp = 0.01% point). The Democratic Party has been on the rise every day after winning the Blue Wave by securing two Senate seats in the Georgia state runoff.

This is because the federal government’s fiscal deficit has soared to a level of 20% of gross domestic product (GDP) in one year, and the trend is highly likely to continue with the’blue wave’ of the Democratic Party. President-elect Joe Biden announced on the 14th that he would announce a Trillions of dollars stimulus package. Not’Billions’ (Trends of Dollars), but Trillions.

If the economy recovers in a situation where so much money is pouring out, inflation will inevitably occur.

Jeffrey Gundlock, the CEO of Double Line Capital, who is called the’Bond King’, told CNBC that day, “Inflation will happen, and it will really be a game changer.” “We have an accurate inflation model on our own, and we expect the consumer price index (CPI) to rise to the 3% level between May and June,” said Gundrak.

This is the most common scenario on Wall Street. Janus Henderson’s John Patulo, co-director of bond strategy, also said last month that inflation is expected to rise sharply as the economic blockade due to the proliferation of the corona is lifted next spring and summer.

Rising inflation and interest rates are threatening the valuation of the stock market and especially high tech stocks. Currently, the S&P 500 is trading at a mid-20x P/E (price-to-earnings ratio), and technology stocks are over 30x.

So far, the New York stock market has soared amid the zero interest rate environment provided by the US Central Bank (Fed). However, the rising interest rates are causing investors a little bit of anxiety.

“The high valuation of the US stock market is supported by a tremendous Fed stimulus,” said Gundrak. “CPI will rise to the 3% level between May and June, and the key is when the Fed will respond.”

Interest rates in the early 1% range are not yet to have a negative impact on the stock market. A Wall Street official said, “A rise in interest rates can be interpreted as a sign of economic recovery. If the economy recovers and corporate profits increase further, the stock market valuation can be maintained even if interest rates rise.”

However, it can be a problem if you keep climbing at such a high speed. “If interest rates rise by an additional 20bps or more over the next few days, the market will beep,” said Mohamed L. Allianz, adviser.

Morgan Stanley and Goldman Sachs also published similar reports that day. Goldman Sachs said, “While more fiscal stimulus measures will drive corporate profit growth in 2021, rising interest rates could limit the upside potential of the PER.” Morgan Stanley pointed out that “higher interest rates can trigger a decline in stock value with’hidden cards’, and now the increase in corporate profits is much more important to stock value.”

Perhaps due to this influence, large technology stocks with a high PER fell relatively sharply. Facebook plunged 4.01%, Apple plunged 2.32%, Google fell 2.31%, and Amazon fell 2.15%. Facebook and Twitter (down 6.41%) fell even further as the possibility of social media regulation in connection with the Capitol riots was raised.

There are many analyzes that the inflation expected in May to June will be temporary. This is because retaliatory consumption suddenly rushes, and it is a view that it should be distinguished from the structural inflation factor, which inflation increases in the mid to long term.

“The data shows that inflation has a stronger correlation with demographic curves than with changes in money supply over the long term,” said Rick Rider, chief investment officer at Black Rock. “Inflation is expected to rise moderately by mid-2021. “It is difficult to accept the warning that there will be much higher inflation as a result of current monetary and fiscal policy, except in the case of another economic blockade resulting in an economic slowdown.”

Chicago Federal Bank Governor Charles Evans also said on the 4th that it will take years to reach the 2% average inflation target. “We will maintain easing monetary policy for a long time.”

We have strong belief that if the 10-year interest rate rises significantly, the Fed will intervene and stabilize at some point. This is because 10-year interest rates are benchmarks such as mortgage and loan rates, and have a large impact on the economy. If it keeps climbing, it could be a cold water for the economic recovery. A Wall Street official said, “If interest rates rise to a level that burdens the stock market or the economy, whether the Fed increases long-term Treasury purchases or introduces a yield curve control (YCC), it will push it in some way.”

The reason the 10-year interest rate will rise even in the Democratic Party’s’Blue Wave’ is because we do not know when the Fed will launch. As soon as the Fed comes out, interest rates will go down, and bond managers who sell bonds will lose money.

Of course, there is a possibility that inflation will rise out of control. On this day, Goldman Sachs changed its outlook that oil prices would rise to $65 in the middle of this year. Previously, it was expected to reach that level by the end of the year. Oil prices have a big impact on prices. The prices of commodities such as copper and grain are also rising significantly.

In addition, the Fed’s judgment may change as the game booms.

Boston Federal Bank’s governor Rafael Bostik said, “I think there is a possibility that the economy will recover faster than expected. In that case, I am ready to withdraw or readjust some of the existing policies and consider raising the benchmark rate.” He just explained, “It won’t happen in 2021, maybe in the second half of 2022 or early 2023.” He also said that this year’s taper ideas are “open”.

Governor Bostik is still a minority within the Fed. After the Federal Open Markets Committee (FOMC) ended last December, the Fed released a dot plot, and only one person predicted a rate hike in 2022. He could be President Bostik. Jerome Powell’s current stance makes it hard to think of the Fed raising interest rates next year.

A Wall Street official said, “It is unlikely at this point, but if there is an uncontrollable inflation, the Fed may have to raise interest rates quickly,” he said. “From now on, it is important to look at inflation and interest rates along with the pace of economic recovery.” Said.

The December CPI will be released at 8:30 am on the 13th. According to Investing.com, last month’s CPI is expected to rise 1.3% from the previous year, slightly rising from 1.2% in November. In addition, the source CPI, excluding food and energy, is expected to be 1.6%, which is the same as delivery. It still falls short of the Fed’s 2% target.

Reporter Kim Hyun-seok [email protected]