[Viewpoint] The 'Everything Rally' That Turned Cash Into Trash

During the long holiday, a variety of issues became topics of conversation at the dinner table. Here is my personal take on the atmosphere.

The news about the emergency arrest and subsequent release of former Korea Communications Commission Chairperson Lee Jinsook was a hot topic (two flames).

The controversy over President Lee Jaemyung and his spouse appearing on an entertainment program also drew attention, though it was less heated (one flame).

The hottest news, worthy of three flames, was the soaring price of gold. Ultimately, people are most interested in news that directly affects them. Some shared stories about digging out gold rings, necklaces, and buttons from their wardrobes, while others recounted how they had forgotten about such items and were pleasantly surprised by their newfound windfall.

It is not just gold prices that have skyrocketed. Stocks, real estate, and cryptocurrencies-safe assets and risky assets alike-have all surged. This is the so-called "Everything Rally." Those holding cash but unable to join the "Panic Buying" feel left out, and even fearful (Fear Of Missing Out, FOMO). The familiar phrase "Cash is King" has even been flipped to "Cash is Trash." On Wall Street, some analysts have described this as the "Surrender of the Bears" phase.

These unwelcome English expressions have something in common: they tend to emerge during bubble phases. The current global economic bubble is fueled by the massive liquidity injected by governments worldwide after the COVID-19 pandemic. That liquidity has now come to be called "trash."

The natural resolution of this situation is inflation. The value of assets attracting money-stocks, gold, cryptocurrencies, real estate-rises, while the value of currencies-US dollar, Japanese yen, Korean won-falls. On top of this, additional accelerators have emerged: the Trump-led trade disputes and concerns over worsening fiscal conditions in countries around the world. Now, investors are flocking solely to non-currency alternative assets such as gold, silver, and cryptocurrencies, while moving away from currency assets like the US dollar, Japanese yen, and Korean won. This is the so-called "Debasement Trade" phenomenon. As a result, currency values fall even further. Among the declining currency assets, the Korean won is relatively more neglected, causing the won-dollar exchange rate to rise even higher (falling value of the won).

Bubbles cannot keep expanding forever. They are bound to burst eventually. If one could predict the timing, it would be a windfall. George Soros, the hedge fund legend, is known for exploiting bubbles. He once suggested that it is possible to sense when a bubble will collapse: "Get on the bandwagon, and if you get off a little earlier than others, you can succeed." On the other hand, the late Charlie Munger, Warren Buffett’s partner and the sage of Omaha, warned, "Stay away from bubbles." Buffett himself tried to quantify bubbles by comparing the stock market capitalization to GDP, suggesting that a ratio above 120% signals overheating (the Buffett Indicator). Currently, the US stock market is estimated to be around 220%, and the Korean stock market around 100%. On October 15, the KOSPI hit an all-time high, ushering in the era of a 3,000 trillion won market capitalization. The Buffett Indicator continues to trend upward.

What about gold and cryptocurrencies? With the so-called "Kimchi Premium," we are on the verge of an era where a single don of gold costs 1 million won and Bitcoin reaches 200 million won. Prices have soared so much that a sudden drop would not be surprising.

Even the genius physicist Isaac Newton once lamented after losing a fortune to a bubble: "I can calculate the motion of heavenly bodies, but not the madness of crowds."

Returning to Buffett: he once said, "In baseball, you’re out after three strikes, but in investing, you can let many pitches go by and still stay at bat." This is advice to patiently hold onto cash as a form of investment, and a reminder that cash is not trash.