Macro Tourist Likes South Korea On Fiscal Stimulus Hopes

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Before we start, I want to give a big thanks to my pal Aidan Garrib’s firm Pavilion Global Markets for bringing this next idea to my attention.  I had completely missed it.

I should have done a better job keeping a lookout for governments hopping on the fiscal bandwagon, but this one slipped through the cracks.

Earlier this month, South Korea President Moon Jae-In announced a pre-election fiscal spending boost (article link):


Please don’t send me any notes about how he is trying to buy votes to get re-elected.  I don’t care.  And, yes for the hard-money-crew, I know this will be a “fruitless waste of money”, but in this global environment of balance sheet constrained economies, I am attracted to governments willing to increase fiscal stimulus.  If you want fiscal prudence, go buy German stocks.  I prefer countries like America and India.  Both countries have increased their spending and relaxed their taxation.  This is the recipe for growth in today’s strange-messed-up-world.  I will leave it to you to decide if it is a long-term societal benefit.  All I know is that it causes the stock market to increase.  Any doubt about that, just dial the S&P chart over the past few years.

Let’s dig a little deeper into the South Korean announcement.  Again, from the FT article:

South Korea plans to pour billions of dollars into developing public infrastructure in a stark U-turn for President Moon Jae-in’s administration, which is struggling to boost growth despite low interest rates and a record fiscal stimulus.  

Seoul will increase spending at state-run institutions by 12 per cent to Won60tn ($51.2bn) this year, with the bulk of the money set aside for infrastructure building and housing construction, the finance ministry said on Wednesday.  

Mr Moon, a popular leftwing leader, had ruled out using the property market to “artificially” boost the economy ahead of his election in 2017. However, he is now under growing pressure to revitalise the economy ahead of new polls in April.

“A shift in policy is under way as the government has become more desperate to boost growth ahead of the election,” said Paul Choi, a strategist at CLSA. “We are likely to see more changes in where the government spends money as it remains questionable how big an impact fiscal stimulus so far has had on job creation and economic growth.”  

Private spending and job creation have remained weak in South Korea, despite the Moon administration’s stimulus efforts.  The government had already committed to an 8 per cent increase in budget spending for 2020 compared with last year, while interest rates are at a record low of 1.25 per cent. Yet, economists expect last year’s growth in the export-driven economy to come in at 2 per cent after 13 consecutive monthly declines in its overseas shipments.

The reason for this stimulus?  The Korean economy has stunk.  Have a look at this terrific chart from Pavilion Global Markets:


What’s interesting to note is that Korea appears to be even more German than the Germans.  From the Pavilion report:

Finance Minister Hong Nam Ki told reporters in November, “we had expected previous efforts at fiscal spending to play the supporting role in adding vitality to the private sector. However, it is not working well with limited spillover effects, making us worried.” While much has been made by the government regarding previous efforts at stimulus, the fact is that Korea hasn’t actually delivered on the promised spending. Post the GFC, when even Germany was running red ink, Korea continued to run surplus after surplus as revenues always outpace public expenditures.

South Korea has finally gotten serious about increasing fiscal stimulus  (let’s hope).

I have been pounding the table on this potential change in attitude towards fiscal stimulus for quite some time.  The worldwide shift is taking longer than I would have thought, but one by one, the dominoes are falling.

I continue to buy the countries that acknowledge this reality.  South Korea is no exception.

I wish there was more to the trade than that, but sometimes the simplest trades are the best.


The ETF is down-and-out.  The government is goosing the South Korean economy in front of the election.  It’s a great risk-reward long opportunity over the coming quarters.


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