Kevin Warsh delivered his first semiannual testimony to Congress earlier this week. In it, he used every opportunity to stress the urgency of returning to the Fed’s 2% target. To wit, he stated, “Inflation will be a thing of the past.” He also said the Fed “has no tolerance for persistently elevated inflation.”
The June inflation report, showing a 0.4% decline in prices, was released 90 minutes before his House testimony on Tuesday. It gave Warsh room to sound determined without the need to promise immediate action via a . He made it clear that while the inflation data was great news, “It’s one data point…. I don’t want to overread or cherry-pick data.”
Kevin Warsh’s aversion to forward guidance was another key theme. His argument, in essence: “We’re human.” Importantly, Warsh seems to understand that behavioral flaws can negatively impact policy. Publish a projection,” he said, and the committee inevitably starts “taking information that’s consistent with our priors and rejecting information that’s inconsistent.” When a person or group anchors to a forecast, they tend to favor it and may be less likely to consider opposing data. In Warsh’s view, when members are not saddled with the perception of prior forecasts, they can be “more circumspect,” which is a better way to set policy.
Warsh did receive a few questions about the Fed’s independence. To wit, Rep. Nydia Velázquez asked whether Warsh “works for” the administration. Warsh replied, “We’re an independent central bank.” When pressed further, he committed only to “follow the law and follow the data.”
The graphic below shows the Fed is currently split on the odds of a September rate hike.
What To Watch Today
Earnings
Economy
One Company- Two Prices: Examining SK Hynix’s Reverse Kimchi Premium
South Korea has long had what is called a “Kimchi discount.” This is the tendency for Korean companies to trade at lower valuations than their global peers due to weak governance and limited shareholder returns. South Korean memory chip maker SK Hynix () just demonstrated the discount in its new US ADR listing.
SK Hynix’s Nasdaq-traded ADR (SKHY) began trading on Tuesday, closing at $193.92, up over 25%. Each ADR represents one-tenth of an ordinary Korean share. That same day, the closed at $1,280. The ADR should have been $128. US investors are paying an approximately 50% premium for identical ownership, underlying business, dividends, and earnings. The only difference is which exchange processes the trade.
Why doesn’t arbitrage close the gap immediately? Part of the gap reflects the structure of the listing itself. SK Hynix’s ADRs can be converted freely into Seoul-listed shares, but conversions in the other direction require regulatory approval. This one-way conversion model mirrors ’s approach. Its US-listed shares have maintained persistent premiums of 13% to 20% for years as the arbitrage mechanism is hobbled by the same conversion limitations.
Tweet of the Day
