On financial industry
- Lots of quant funds operating within the South Korean market
- Very fund has its own strategy and model
- Things will work until they don’t.
- The long tail where shit happens can be very fat
- Funds tend to graduate towards excessive leverage overtime. This is the nature of an industry largely driven by fear and greed
- KoStar, Korea’s equivalent to Nasdaq is the exchange of choice for Quant operations
- more volatility
- Merrill Lynch in South Korea
- their two largest clients are quant funds
- Citadel capital
- Susquehanna Capital group
- drives 10% of all daily transactions on the Korean stock market
- up to 100 times per day on each listed company
- client requirements
- lesser demand for sales and account representatives
- demands for high throughput cable connection to their exchange networks
- client technology stack
- large scale utilization of neural networks
- Equities sales representative teams has been reduced from 8 to 3 over the past year
- On valuation and economy
- Multiples are becoming exceedingly high given free money provided by Federal reserve and central banks around the world with low to negative interest ranks
- largely driven by decoupling of interest rates and inflation
- global deflationary pressures
- aging population
- productivity driven by technology proliferation
- asset prices will contract when interest rates increases
On real estate industry
- property prices has more than doubled in prime Gangnam area in Seoul over the past 4 years
- In times of economic recession property valuation at the center of premium districts will remain stable while those at the fringes will become soft
- segments within the prime Gangnam area
- integrated apartments
- situated in complexes with amenities day care services and grocery stores
- USD1000/sqft – USD1 million for a 3 bedroom apartment
- normal apartments
- up to 16 units within a building
- USD700/sqft – USD750K-800K for a 3 bedroom apartment
- While governments of both Japan and Korea are trying to further decentralize urbanization across their countries, organic tendency thus far has been towards centralization. Seoul and Tokyo occupy major proportion of the population with smaller townships in the outer fringes dying out. Same thing is observed with San Francisco, coastal cities of Australia and Auckland in New Zealand.
Shifting population and resource equilibrium
Phases in the cycle
- economy booms
- competition for resources increases
- housing and other amenities will become less affordable
- income gap increases
- people will have children later or opt not to have children
- population starts aging at an accelerated rate
- spending drops as population aging continues and population size starts contracting
- economy slows down and starts contracting
- competition for resources decreases
- labor shortage becomes pronounced and wage levels starts increasing
- housing and other amenities become more affordable
- household confidence increases leading to more children
- economy starts growing
East Asian countries
- South Korea
- is in the mid phase where households are feeling the pinch of scarce resources
- birth rate per woman is starting to fall
- 2019 fertility rate is at 1.323 per woman
- in the latter phase where population decline
- labor shortage are becoming pronounced
- New college graduates are in high demand and can easily find jobs
- 2019 fertility rate is at 1.478
- immigration laws are loosen
- Money laundry capital of the world
- Stable government and economy
- the SGD1000 note receive a premium rate brought to South Korean exchange offices
- fertility rate is one the lowest in the world at 1.26 per women, the government has long adopted a very loose immigration policy to offset the deflationary effects of an aging population
- Net effects on the economy
- continued influx of high income earners and high net worth individuals
- continued lowering of birth rates
- average income per capita will continue to increase as low income households continue to die off due to low birth rates
On Korean politics
The legal framework is split into the police and the prosecutors. With the police handling the day to day executive work and the prosecutors given the right to investigate into any issues of concern.
The prosecutors has grown big in numbers over the past few years and the government is trying to curb its influence so as to maintain balance within the system.
The police was involved in a drug scandal in Gangnum where three popular night clubs were closed down. The prosecutors are using this as leverage to remove the brake on their continued growth in influence. Meanwhile Octagon which had been steadily losing popularity due to the existence of the three clubs is now surging in popularity again. This is mainly due to the lack of alternative options in the Gangnum area.
Keep things simple. Simple should not be confused with easy.
Business model assessment
- Easy to understand economics
- Strong defensible moat
- Trustworthy management who treat capital of shareholders with ownerlike care
- Selling at a reasonable price
- Able to generate high returns without excessive usage of debts
- Stick to companies with your circle of competence
- Ignore macro economics trends and analyst forecast
- Choosing between growth and value is a misguided one. See the business model holistically.
- A share in a business is basically a bond whose coupon rate you need to figure in yourself
- The character flaws of an individual tend to have very serious spill over effects. Always check for serious character flaws of individuals whose company you plan to invest in.
- Buy cash generating assets to finance purchase of more assets
- Insurance is a prepaid model
- Blue Chip is a prepaid stamp sales model
Management of cashflow
- Give out dividend
- Share buy back
- Reinvest or MnA
The last option is almost always value destroying unless the management can generate ROI above it’s current RoA rate. This is predicated upon a strong defensible moat.
- Ability to focus
Following the end of world war two, with US being the world’s largest creditor, countries started largely denominating their debts in USD. US in turn pegged USD to a fixed exchange rate with Gold. This agreement was formally known as the Brettonwood Systems.
US experienced difficulty backing this exchange rate during the oil crisis of the 1970s when OPEC started artificially reducing it’s supply of oil thereby driving it’s price in USD. This had a strong downwards pressure on value of the USD which the US propped up through use of their foreign reserves.
Seeing this weakness in US foreign reserve, thereby an discrepancy of the USD against gold, other trading partners started exchanging US dollar for gold. This added further pressure.
To provide relief on their foreign reserves US finally decoupled the fixed exchange rate between USD and gold. This resulted in the collapse of the Brettonwood Systems, leaving USD as the official reserve currency in the world without any underlying backing.
What followed were decades of global growth largely funded by the US government through control of the world’s reserve currency.
Developing countries would sell goods to the US in exchange for USD. Instead of buying US goods in exchange for the USD earned, they would buy US Treasury bills, notes and bonds. This had the effect of maintaining favorable exchange rates for these countries while keeping their products competitive in the US market.
This widespread practice had the long term effect of driving balance of trade deficits in US with it’s trading partners. While negligible in times of strong US domestic GDP growth, this system has of late started exhibiting difficulty sustaining. This is largely due to slow down in US domestic growth and its inability to scale to support trading partners that 4 times times the population size of the US.
It is advised countries which had long relied on this approach to domestic growth transit their economies to become net importers as soon as their economy gains the necessary growth momentum to do so.
- Fault lines, Raghuram Rajan