- The export-driven South Korean economy is threatened by China’s latest currency devaluations
- Jim Rickards reflects on his time in Seoul with Ben Bernanke and South Korean bigwigs
- U.S. markets stumble on wild Asian trading
- Wal-Mart gets out-Wal-Marted
- A novel way to increase tourism… a reader reflects on the fate of the country… and more!
If China sneezes, the whole world catches a cold, as the saying puts it.
If that be the case, then South Korea better start taking its vitamin C. It’s right across the Yellow Sea from the sternutating Chinese schnozz. And the germs are spreading fast…
As we’ve documented exhaustively in these virtual pages, Beijing sucker-punched world markets last week by devaluing its currency not once… not twice… but thrice.
So doing it unleashed the latest salvo of the currency wars, wars chronicled in their gory detail by our own Jim Rickards. And South Korea will be among the first casualties of the Chinese offensive — it’s one of the countries most vulnerable to Chinese devaluation, according to Jim.
“Its currency and its stock market could both crash.”
South Korea, taking a page from its Japanese neighbor, has risen from a harsh poverty by exporting cheap goods abroad. It stole a three-decade march on the behemoth China, getting in the export game in the early 1960s.
It’s now the world’s seventh top exporter and its 12th-largest economy.
And South Korea is also one of the few countries to escape the dreaded “middle-income trap,” a trap into which fall many countries that butter their parsnips through cheap exports.
These countries often lose their competitive advantage when their exports attain certain levels. Increased productivity ultimately leads to higher worker wages and more expensive products, so their goods grow more expensive on the international market. Other nations undercut them and it’s back down the latter. Hence “trap.”
The Land of the Morning Calm has managed to escape the snare by transitioning to high value-added products and focusing on innovation.
But as the world’s seventh-leading exporter, on what does it rely? A fairly cheap currency — in this case, the won.
And what became more expensive after China’s little gambit? The won.
“When foreign buyers look at possible exports from Korea, Taiwan or Japan, the strong Korean won makes their goods less attractive,” Jim explains.
The damn thing is just too expensive. Mr. Rickards continues:
“Japanese cars look cheaper than Korean cars to a buyer in Australia, so Japan gets the sale and Korea does not. Likewise, Chinese buyers paying in yuan will think twice about buying from Korea when the strong won makes the price that much higher to the Chinese consumer.
“This strong currency problem applies not just to tangible exports, but also to services and tourism. Recent growth in China has seen a boom in Chinese middle-class tourists eager to see the world. Despite Korea’s geographic and cultural affinities to China, tourists are avoiding Korea in favor of destinations such as the Philippines and Vietnam because Korea’s strong currency makes it too expense relative to alternatives.”
Not helping the South Korean tourism industry: an outbreak of the fatal Middle East respiratory syndrome (MERS) this spring.
The outbreak, which claimed about 30 victims, led to a 40-something-percent drop in tourism in June. Visitors from Taiwan and Hong Kong dropped the most, by 76% and 75%, respectively, from a year earlier.
Jim was in Seoul in May along with Ben Bernanke and the honchos of the South Korean business world.
Jim, lower left.
On what topic did they most eagerly solicit Jim’s advice? What to do about the strong won. And that was before China’s recent bolt out of the blue.
“Now Korean exports to China are reeling again. Korea will suffer even more if the U.S. goes to a cheap dollar policy as I expect in 2016,” Jim explained yesterday.
But maybe you don’t like Hyundai and don’t care two pins for Samsung. Fair enough. But South Korea happens to be one of the world’s most important economies. And it’s a treaty ally of the United States, hosting some 30,000 American troops.
Geopolitical tensions in East Asia are already at a low boil as China has been throwing its weight around in the neighborhood. And throw a new currency war into the mix? It’s all fun and games until somebody gets hurt. Asia isn’t Europe, ya know — there’s no Asian EU. It’s like pre-WWI Europe in some ways. Just saying.
A strong currency — the source of a thousand fears and forebodings…
It all makes us wish that someone would read a little Henry Hazlitt. In his masterpiece of logic, Economics in One Lesson, he lays fire and sword to the fetishization of exports in the chapter “The Drive for Exports.”
But nobody will.
And as Mr. Rickards explains, “Currency wars have no logical conclusion until there is either systemic reform or systemic collapse. Right now no serious effort at reform is underway. Systemic collapse remains a possibility.”
And a Merry Christmas to you, too.
But the good news is that you can actually profit — substantially — from South Korea’s reaction to the Chinese assault on its currency. Heck, might as well. Here’s how.
Speaking of Asia…
U.S. stocks are trading sharply lower today after a roller coaster ride in the Chinese market sent Asian stocks down. Concerns about Chinese economic stability were the theme.
The Shanghai Composite closed 1.24% higher overnight after slipping over 4% at its lows. (Plunge Protection Team?) The craziness sent the Nikkei down 1.6% and the Hang Seng index down 1.3%.
So the Dow opened 150 points lower and is down about 200 at writing. Both the S&P and Nasdaq are off about 1%.
Good times.
Meanwhile, gold caught a tail wind, up $11 in change, to $1,128.
Can’t say the same for oil. West Texas Intermediate fell to $41 after the U.S. Energy Information Administration reported an unexpected rise in crude stockpiles last week. The stuff hasn’t been that cheap since March 2009. $100 oil seems an eternity ago.
Beware the “Amazon curse,” warns our resident chart chimp, Greg Guenthner.
If you’re Wal-Mart, that is.
“Last month, ‘e-tail’ king Amazon knocked Wal-Mart off its throne when its share price jumped above $560 on upbeat earnings. That boosted Amazon’s market cap above Wal-Mart’s for the first time ever. The once-powerful megastore got shoved off the top rung of the retail ladder,” Greg explains.
He also poses the somewhat leading question, “Is this the beginning of the end for brick-and-mortar retail? Are discounters like Wal-Mart dead stocks walking, victims of the ‘Amazon curse’?”
There is a note of irony to be found here. It was Wal-Mart that took the legs out of mom and pop merchandisers throughout America with its “everyday low prices.”
Wouldn’t it be a hoot if Wal-Mart got waylaid by Amazon’s even lower everyday prices?
We end up where we began, in South Korea…
As explained above, South Korean tourism, such as it is, is off dramatically after a spring breakout of the euphonious Middle East respiratory syndrome.
Well, according to Bloomberg, the South Korean authorities have alighted upon the perfect solution to goose tourism.
Offer foreign tourists a 10% refund on plastic surgery.
That’s right. If you’re in the market for a face-lift, liposuction or breast enhancement, you might want to consider a trip to South Korea.
“Seoul’s BK Plastic Surgery, located in the so-called beauty belt of Gangnam alongside hundreds of other cosmetic surgery clinics, offers airport pickups and makes hotel reservations for foreign clients. The clinic has about 20 surgeons and 15 interpreters, speaking languages including Chinese, Japanese and English. The website features messages from Korean celebrities popular in China, including actor Chae Rim,” Bloomberg reports.
It may surprise you to learn that South Korea is the plastic surgery capital of the world. On a per capita basis, anyway. About 2% of the population have gone under the knife for cosmetic tuneups. It’s about 1.3% for the United States.
Come on, America, get going. You’re not No. 1 at something.
Going into the mailbag, a reader reflects on the “FRAGILITY OF THE SYSTEM.”
“As I read The 5 today, all the unknowns and unpredictables are challenge enough, but after enduring the many articles and comments, pertaining to the 70th anniversary of the end of WWII and the resumption of relations with Cuba, I would add one more threatening and uncorrectable condition of our society.
“We have a huge portion of our population who are clueless as to our history, even while sporting multiple degrees from our best schools.
“We seem to have at least two generations who were taught nothing of our history or were deliberately fed anti-American garbage.
“As a country, we have a huge number of citizens who have no idea who we are or how we got here. I’m sad and scared.”
We suspect you’re not the only one who’s sad and scared — or at least one of those. Call it civilizational decline, or whatever you will, but it’s a steep hill to overcome.
But we do our best and encourage you to do the same.
Best regards,
Brian Maher
The 5 Min. Forecast
P.S. Dave is off on a richly deserved vacation through the end of the week, so I’ll be filling his shoes, however poorly, for the next few days. He’ll be back Monday.
P.P.S. Many look back to the Reagan years as some of America’s best. So we thought you might want to see this powerful story.
In 2004, Ronald Reagan passed away after a decade-long battle with one of the world’s most devastating diseases.
He had Alzheimer’s. And he was far from alone in his fight against it…
According to a recent study, one in nine elderly Americans has Alzheimer’s disease.
That’s over 10% of America’s elderly citizens — and it’s only getting worse.
That’s what makes this expose all the more shocking.
What you’re about to see has been called the cure that could have changed Ronald Reagan’s life.
And the reason you haven’t heard of it will turn your stomach. (Hint: It has to do with Big Pharma…)
We urge you to click here to view now, while it’s still available.
As soon as Big Pharma gets wind of this, they will be very unhappy.