Hello, this is Yangho. Today, let's talk about the TV debate between Biden and Trump last week. Since then, Trump has received a lot of attention. Even in The Economist, they went as far as talking about Biden like this. Biden, you have had a long political career, and among all the things you have done well, there is one thing you should do best, which is to step down by yourself. That's how much Biden's status has plummeted now. Also, there is advice like this going around. Current and former Democratic Party members, including former President Obama, are saying that they all need to find someone to go to. What they are saying is that they should go to Biden's wife and persuade Biden to stop now, telling him to come down. This is the extent to which Biden's defeat and Trump's rise are being staged right now.

As Trump has emerged, there is a place that is trembling right now. So today, let's talk about that. The title is liquidity. You may have heard more about volatility than liquidity. So, you have probably heard a lot that when the market is unstable, volatility increases. However, you might not understand liquidity well. Personally, I think liquidity is a story that is three to five times scarier than volatility. So, let me explain how volatility and liquidity moved in the U.S. bond market in the past by drawing a picture. In 2020, during the time of the corona crisis, the volatility index went up like this and then came down a bit. In other words, volatility increased significantly, indicating that the market was uneasy.

This is a picture that is being shown, and in 2023, when the SVB bank burst, the volatility went up again, but now it is showing a stabilizing trend. This is how you should see the current situation. From now on, I will draw a liquidity chart. Liquidity moved like this, similar to this. Similar until now, but starting from 2023, it starts to behave strangely. It goes up more and more, showing a pattern of going up again. At that time, there was an event where Fitch downgraded the U.S. national credit rating, and since then, liquidity has been deteriorating, leading to a worsening environment. Liquidity is deteriorating in the U.S. Treasury market. Also, the volatility is much worse now. What does it mean that liquidity is deteriorating, and then I will explain what liquidity is.

I will try to explain liquidity broadly, and it can be explained in two ways. First, when you want to sell without a loss, you can sell it without any loss. This can be summarized as being able to liquidate without incurring a loss. Having good liquidity means being able to liquidate without incurring a loss. A situation where liquidity is poor means having to sell at a loss when you want to sell. For example, let's say Samsung Electronics is currently at 80,000 won. Some may want to buy at 79,000 won, some at 78,000 won, and some at 77,000 won. However, if there is no liquidity, the situation could be that there is no one willing to buy above 77,000 won.

I thought the house price was 1 billion KRW, but when I put the house on the real estate market, someone below is offering 800 million KRW. In this situation, when it becomes like this, it means that there is a lack of liquidity. When there is high volatility, the price fluctuates a lot, so it can drop or rise rapidly. When we say there is high volatility, it means that the liquidity situation has worsened. How will the price move when the liquidity situation is not good? It moves like this. It was thought to be 1 billion KRW, but suddenly it becomes 800 million KRW. It was thought to be 1 billion KRW, but suddenly it becomes 700 million KRW. It can change like this in an instant, indicating a risky situation. That's why I mentioned from the beginning that volatility, liquidity, from three to five times, is a scary story. And true to that,

It might be too shocking to say that it's not about a different market but about the U.S. Treasury market, in other words, the story of the market where the U.S. government borrows money. To explain why liquidity is important more specifically, let's first think about the case of borrowing money from a bank. When a company directly borrows money from a bank, the bank is here, and company A borrows money. The bank would say, Mr. A, it seems like your business is doing well these days. Last year, the interest rate was 5%, but this year, I'll give you 4%. Well done, good for you, they would say like this. And now, there is this company. To the owner of this company, they would say, Mr. Owner, it seems tough for you these days. How about your business? Seems like you didn't do well last year. We borrowed at 5% last year, but it might be difficult this year.

I think about 7% should be given, is that okay? And talking about A company, how are they doing it? Oh, the CEO seems to be having a hard time these days. What should we do? Oh, it's because the boundaries are not clear. Well, in terms of interest rates, this is how we manage it. So, what's the key point here? It's the bank. The bank plays a crucial role in the financial system of lending and borrowing money, and naturally, the bank also takes responsibility. But is this the only market? No, it's not. There is the indirect financial market. This time, it's the opposite. People go to the market and ask for money. I am this kind of person, doing this kind of business. How about it? Is it okay? Then, please lend me some money. This is what the company talks about. B knows.

In the case of companies, it's the same. They ask for some money to borrow. It's the same with acquaintances, asking to borrow some money. So, in this case, we call the person who lent the money an investor, and in this case, the investors take responsibility. In other words, in this case, the bank takes responsibility. I'm the one doing it now. I decide on the interest rate under my responsibility, and I decide whether to lend the money under my responsibility. If I embezzle the money, then it's my fault. On the other hand, in the indirect financial market, the responsibility falls on the investors. But isn't it too scary that the responsibility falls on the investors? When I lend money, I might worry about what to do if it's embezzled. So, to make this market work well, what do you think is the most needed? It's liquidity.

In order for this market to become a market where someone lends money to the US government and then you take a piece of it when you lend it, the liquidity needs to be good. The current situation is that the liquidity is not very good. Then, what I am curious about is why the US Treasury market has deteriorated in liquidity like this. If you think about why the US interest rates, the so-called US interest rates, have deteriorated in liquidity, you need to think about what they are a function of. You need to think about how much the country is growing, what the inflation rate of the country is, how big the risks are, etc.

It's influenced, and recently, one of the most important roles in determining U.S. interest rates is the discussion about supply and demand certificates. When you look at it, it's a story that affects interest rates in the bond market in the traditional financial market, not by factors like growth or inflation risks, but by supply and demand. It's a really fundamental story. Nevertheless, what should we do? We need to check it once. Let's start by talking about supply. So, it's about the supply of the U.S. Treasury market. In other words, it's about how much money the U.S. government needs to borrow. Instead of just saying this much or that much, let's check the numbers accurately today. So, the U.S. government has...

We collect taxes, which means collecting money, and then we spend it. But recently, if you look at it, the U.S. government has collected about nearly $5 trillion in taxes. However, they spend around $6 to $7 trillion. There is a bigger deficit. Surprisingly, the U.S. government used to spend around $6 to $7 trillion a year even in the past. During the time of COVID, it was only $3 trillion. So, when they first spent $6.5 to $7 trillion during COVID, what did people think? They thought, Wow, they are spending a lot, but it will come back soon since it's because of COVID. But it didn't come back. Since then, they have been continuously spending $6 to $7 trillion. Did the taxes increase? No, they did not. So, the United States.

What does the government need? It needs to borrow money. There is a budget deficit, so to cover this deficit, money needs to be borrowed. But what does it mean to borrow money? It means issuing government bonds. It's a story about increasing the supply of government bonds. Just recently, in the United States, there is a place called the 12 responsible for the budget. They made an announcement. Actually, I thought there would be a deficit from the beginning of this year. So, estimating in February, after the U.S. government did this and that, when I looked at the size of the deficit, I thought it would be around $1.5 trillion. However, recalculating in June, oh, sorry, it's not $1.5 trillion, sorry, it seems like there will be a $1.9 trillion deficit. Oh, this...

What should we do? Talking about how to deal with a $1.9 trillion deficit, we need to learn how to borrow. So, we need to issue much more government bonds than expected. In this situation, would you want to lend money to someone in this situation? I don't think so. But did I notice this situation alone? Probably all investors did. So, let's look at it from the demand side. From the demand perspective, there is someone who lent a lot of money to the U.S. government. Who is that? It's the U.S. Federal Reserve. But an interesting point in the U.S. is that the amount of money lent to the U.S. government by the Fed, which was about $6 trillion, has now decreased to about $4 trillion. To put it simply, this is what it means. Powell is talking about Biden and so on, with that in mind.

Some taxes were cut, and now they are really pushing to pay off the AIU, so $2 trillion has been reduced. $2 trillion has been reduced. So, in this situation where $2 trillion has been reduced, we use the term QT in professional terms, indicating quantitative tightening is underway. Secondly, besides the Fed, there is a place that lends a lot of money to the U.S. government, which is foreigners. Foreigners, during the time when the U.S. government was borrowing a lot of money, almost did not lend money. Why? They noticed something fishy. Oh, something seems strange. Oh, we shouldn't lend money to these guys, they thought, and lent roughly about 0.6 trillion dollars. They hardly lent anything. However, in the meantime, in the past, they lent money to the U.S. government and just left it there without asking for it back.

Most of it has almost disappeared, so the weight is 0.1 trillion dollars, and 0.5 trillion dollars are like, Hey, the U.S. interest rates are so high, so I'll lend it to you, and people who just came in and out, that's right. In the past, it wasn't like that. When Saudi Arabia sold oil and received money, they had no intention of repaying the dollars they borrowed from the U.S. government. Why would they repay it? It was a thought for later. And even in China, when they exported abroad and received dollars, they had no intention of repaying them when they borrowed them back to the U.S. government. They just thought it was safe and good to hold U.S. concrete. Why repay it? But now all those thoughts have changed. No, in this situation, why would I think about lending money to them?

It seems that foreign investors around the world are not investing because the interest rates are high like termination funds, so there are only those who are considering entering and exiting for a short period. Surprisingly, only U.S. stores lend money to the U.S. government. It seems that U.S. stores have lent about $2 trillion to the U.S. government. Perhaps individual investors from South Korea are also included in this. In this way, liquidity is becoming seriously unfavorable, and as a result, the market function may not work properly, leading to the worst-case scenario. In such a situation where the government's finances are continuously in deficit and there are no buyers, there is one prominent figure who appears, and that is Trump. If this person, Trump, becomes president, he will likely reduce taxes first. Do you hear the sound of the government's income decreasing? And the expenses will increase.

I think there might be more bread crumbs. In this situation, one might think that if Trump becomes president, they could trust the U.S. government more. Already, with the lack of liquidity, the U.S. Treasury market is becoming more difficult, and it could be a significant threat. Since the TV debate between Trump and Biden, the U.S. 10-year interest rate has shown an increase of 20 basis points. In fact, what I mentioned today is unrelated to whether the Fed raises or lowers interest rates, or what the growth rate and inflation are. It is a discussion about supply and demand. I mentioned that it seems quite out of place to talk about U.S. interest rates, but even so, now with the mention of Trump, you should focus much more on this aspect.

That's right. The situation is that U.S. Treasury yields are a bit high, so they are expected to decrease. Many people think they will go down, and I also think so. However, it would be good for you to be aware of the possibility of potential issues arising. If such a problem occurs, it may not just drop to a reasonable price but could plummet. I believe it is necessary to invest while keeping this in mind. Well, if you found today's content helpful, please do not forget to like and subscribe. That's it for now.

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