The global stock bond exchange is suffering from dual core impact!

Author: President Qinghe wechat official account: zhibenshe (id:zhibenshe0-1)

In the early morning of the 14th Beijing time, the international financial market encountered “Black Monday”.

The stock market fell sharply.

The NASDAQ index closed down 530.80 points, or 4.68%, at 10809.23; The standard & Poor’s 500 index fell 151.23 points, or 3.88%, to 3749.63. The Dow Jones index fell 876.05 points, or 2.79%, to 30516.74. The market panic index CBOE volatility index (VIX) rose more than 25% to 34.82.

European stocks were not spared. Britain’s FTSE 100 index fell 1.59%, Germany’s DAX index fell 2.53%, and France’s CAC 40 index fell 2.67%. Fortunately, the panic did not “kill” the Asia Pacific stock market in Japan.

US debt is upside down.

The yield of us 10-year Treasury bonds exceeded 3.44%, the highest level since 2011. In intraday trading, the two-year and 10-year maturities were reversed again, which is usually considered by the market as a signal of economic recession.

Meanwhile, bond yields in Britain, France, Germany, Japan and South Korea soared. The yield of the 10-year British Treasury bond broke 2.51%, the yield of the 10-year German treasury bond broke 1.63%, the yield of the 10-year Korean treasury bond once rose to 3.7%, and the yield of the 10-year Japanese treasury bond rarely rose to 0.25%, all of which are periodic highs.

Foreign exchange market turbulence.

The dollar index rose to 105.28, the highest level since 2002. Non US dollar currencies fell one after another, and the yen fell below 135, the lowest since 1998; The euro fell below 105 in intraday trading, the lowest since 2003; Sterling fell below 0.82; The offshore RMB hit 6.78 in intraday trading.

Crude oil fluctuated at a high level, with Brent crude oil breaking through $123 / barrel in CFD trading; Gold hit 2.94% to close at 1820; Bitcoin fell below $22000 in intraday trading, and the digital currency fell sharply.

Why?

In the article “this time is different, be alert to the dual core impact”, I have a basic analytical framework for the global financial market this year, that is, the dual core impact.

The so-called “dual core impact” refers to the rapid unilateral appreciation of the US dollar driven by the aggressive tightening policy implemented by the Federal Reserve under the pressure of large inflation. The Russian Ukrainian war and the oil and gas from Europe and the United States to Russia triggered a sharp rise in international crude oil (food) prices, which mutually enhanced the impact on the global financial market.

Among them, the stock bond exchange is the hardest hit area of the dual core impact.

This article is the second part of “dual core impact”, which analyzes the operation of the Federal Reserve and the trend of the financial market with the dual core impact as the main line.

Text logic

1? Inflation: dollar, oil and commodities compete

2? Dual core impact: stocks, bonds and exchange rates all fell

3? Currency illusion: investment, consumption and employment will cool down

[6000 words of text, 20’reading time, thanks for sharing]

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one

Inflation inflation: dollar, oil and commodities compete

The direct cause of the financial bloodbath was that the US inflation exceeded expectations in May.

On June 10 local time, the US Department of labor released data showing that the US consumer price index (CPI) rose by 1.0% month on month and 8.6% year on year in May, hitting a new high in 40 years.

After the release of the data, the financial panic spread rapidly, the US dollar index and the yield of 10-year Treasury bonds rose sharply, and the three major US stock indexes fell continuously. Why did inflation exceed expectations and cause financial turmoil?

Nowadays, there is a kind of moral hazard in the US financial market, which I call “blessing” mentality.

Investors are afraid of the radical tightening of the Federal Reserve, and Federal Reserve Chairman Powell is also worried that the radical tightening will lead to the collapse of the financial market. In other words, everyone wants to continue to live a relaxed life. But inflation is the only way to end fed easing. Investors and the Fed can only hope that inflation will be lower and that they will not be cornered. As a result, the data came out and there was no way out. The chase inflation forced the Federal Reserve to raise interest rates aggressively, increasing uncertainty.

So far, the performance of the Federal Reserve in this round of “monetary normalization” can be judged as “failure”. In my article last year, I hoped that the Federal Reserve would raise interest rates in the second half of the year, but I hastily raised interest rates in March this year. Now Powell also regrets that it was too late to raise interest rates. Finance minister Yellen directly admitted that his judgment on inflation last year was wrong. The two technocrats in charge of the U.S. currency and finance misjudged, and the consequences were extremely serious.

At the same time, Powell’s operation was also a deterrent to rats, and he played cards almost every time. Before the interest rate hike in March, Powell repeatedly communicated with the market to ensure that the market expectations were consistent with those of the Federal Reserve. In May, when the interest rate was raised by 50 basis points, it kept pacifying the market, which also led to a “synthetic fallacy” in US stocks. There is also no “surprise” in June. The Federal Reserve gives the market a big stick and milk sugar at the same time. This clear card without “surprise” is difficult to control inflation in the short term.

The market believed that the Federal Reserve did not dare to tighten excessively, which is also the case. Powell had no choice but to raise interest rates. Powell’s “courage to act” is more than Bernanke’s and less than Volcker’s; The former is loose action, while the latter is tight action.

Powell’s analysis cannot be said wrong. He believes that the current inflation is partly cost inflation caused by supply constraints such as war, sanctions and supply chain, and partly inflation caused by overheated demand caused by monetary factors. The Federal Reserve can do nothing about the former, but can solve the latter (it is suggested that the macroeconomic community should not confuse the two. The two belong to the same symptom but different causes, and the latter is inflation).

How to distinguish?

The indicator adopted by the Federal Reserve is the personal consumption expenditure deflator (PCE) launched by the Bureau of economic analysis of the US Department of Commerce, especially the core PCE excluding energy and food prices. The Federal Reserve believes that this indicator can better reflect real inflation, that is, inflation under its control. In April, core PCE increased by 4.9% year-on-year. If the Federal Reserve continues to implement the tightening policy, the core PCE will drop to 2% year-on-year, and the CPI will drop to 4.5%. The anti inflation task of the Federal Reserve will be basically completed. The 2.5% difference in CPI is due to the oil factor, which is the responsibility of the White House.

However, Powell neglected a key factor, that is, the market game.

First, the game between the Federal Reserve and investors.

As I said before, there is an identity paradox in the central bank. The central bank is both a public institution and a market transaction subject, and their behaviors are bound to conflict. Greenspan is a chairman who is keen on market trading. He has fought with investors for more than a decade. But the last time, he missed, leading to the subprime mortgage crisis. Since then, Congress has made verbal criticism and written criticism. The three successive presidents have all acted carefully, and the Federal Reserve has strengthened its identity as a public institution.

Powell is a very different chairman from Greenspan. He is committed to information disclosure, weaker than expected management, and avoids the role of the Federal Reserve as the most powerful market trader. The Federal Reserve deliberately leaked its cards to the market before it opened each time, but the market believed that the Federal Reserve was afraid of the market. Powell is right in theory that the inflation driven by oil is not under our control, but the market will think that the Federal Reserve dare not take responsibility. In this way, moral hazard accumulates, and investors do not easily compress their balance sheets, or even wait for the Federal Reserve put option to appear and then bargain hunting.

The logic of tightening policy is not to rely solely on the central bank to pump water, but to “command” the market to synchronously compress the balance sheet. Today, the broad money of the United States is $21trillion, and the Federal Reserve has shrunk its balance sheet by less than $1trillion a year. The real effective tightening is that the Federal Reserve drives up the market interest rate by raising the federal funds rate, shrinking the balance sheet and managing expectations, and urges enterprises and households to compress their balance sheets. This is the connotation of “never go against the Fed”, but Powell did not support the Fed.

Second, the game between the US dollar and oil.

During the great stagflation in the 1970s, all three US presidents put the blame on the Middle East War and oil traders. Burns, then chairman of the Federal Reserve, cited the classics and said that oil inflation was not the responsibility of the Federal Reserve. Under the guidance of Mundell, the officials of the budget department of the Reagan administration made a data model. This model predicts a “wonderful spectacle”: when the Federal Reserve substantially raises the federal funds rate and the US dollar continues to rise sharply, international capital will abandon the anti inflation commodity oil and buy the US dollar and US stocks on a large scale. At this time, Volcker, then chairman of the Federal Reserve, was doing so. After experiencing the difficult Volcker moment, in the winter of 1982, the “wonderful spectacle” appeared. International capital withdrew from oil futures and switched to US dollars and US stocks. Oil prices fell and US stocks rose.

The internal logic here is the competitive relationship between the US dollar and oil. It needs to be understood from two aspects: on the one hand, war and sanctions constitute a hard supply constraint, which is the fundamental factor for the rise of oil prices; On the other hand, the excessive issuance of US dollars and the oil futures pricing power controlled by international capital are the monetary factors for the rise of oil prices. In other words, there is also a demand factor for the rise in oil prices, that is, the demand for investment speculation is overheated. Volcker’s reckless interest rate hike and the rebuilding of international capital’s trust in the US dollar weakened the demand for oil speculation. Today, the currency foam of oil is much bigger than that of Volcker. The interest rate hike squeezes the foam even bigger. Powell has a certain operating space.

Next, at the upcoming two interest rate meetings in June and July, the Federal Reserve will come up with a resolution to raise interest rates that exceeds market expectations, suggesting a single interest rate increase of 75 basis points.

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two

Dual core impact: stocks, bonds and exchange rates all fell

Many economists likened the current US chase inflation to the great stagflation of the 1970s, believed that the chase inflation would last for a long time, and called on Powell to regain Volcker’s “tiger wolf potion”.

There are similarities between the two big inflation: the inflation level is above 8%; Keynesianism occupied the Federal Reserve, the former was samuelsonism, and the latter was modern monetary theory, which implemented loose policy for a long time; All war factors triggered a sharp rise in oil prices, the former was the Middle East War, and the latter was the Russia Ukraine war.

However, there are also key differences in the causes of inflation between the two: an important factor in the Great Inflation in the 1970s was the collapse of Bretton Woods. The collapse of the system means that the US dollar defaults, which is equivalent to the credit collapse of the US dollar. Since then, the US dollar has depreciated three times in a row. This is the main reason why this great expansion has lasted for ten years.

At the specific operational level, Powell needs to adopt Volcker’s “unswerving” will, but does not need to use Volcker’s “agent of tiger and Wolf” (the federal funds rate is above 20%). Why?

The market’s perception of the Fed as a counterparty today is very different from that in the 1970s. In the 1970s, investors, economists and the Federal Reserve did not believe that inflation was the responsibility of the Federal Reserve. The prestige of the Federal Reserve is limited, and the market places more reliance on the White House to ease inflation through tax increases and price controls. After years of ineffective administration in the White House, people’s expectations of inflation have become stubborn. When Volcker took over the Fed, the market was still skeptical of the Fed’s actions – a dead horse should be a living horse doctor.

Finally, Volcker’s “unswerving” action hit the market’s inflation expectations and rebuilt the market’s trust in the US dollar. Later, through the operation of Volcker and Greenspan, the Federal Reserve has become the most powerful trader. Nowadays, the responsibility and ability of the Federal Reserve to control inflation have been deeply rooted in the hearts of the people. The monetary policy of the Federal Reserve almost determines the economic cycle, and any “disturbance” of the Federal Reserve may set off a bloodbath in the market. Within the Federal Reserve, when big inflation breaks out, it has become a “deep-rooted” consensus that inflation control is the primary task. This is Volcker’s political legacy.

Therefore, it is not so difficult for Powell to regain Volcker’s will and use Greenspan’s game theory to suppress inflation. The problem now is that Powell is armed with a heavy sword but has no chivalrous courage and lacks the fierce wind to combat inflation expectations and moral hazard.

What Powell did next determined the direction of the US economy.

Powell has already retired this midsummer.

Before that, Powell played cards every time, and the market was easy to lose weight, which was equivalent to stealing the bell from the ear. As a result, the consumer price index (CPI) rose by 8.6% year-on-year in May, and the market immediately collapsed. Many Wall Street investment banks predict that the Federal Reserve will raise interest rates by a single 75 basis points in June or July. Expectations have come up. If the Federal Reserve fails to keep up or just caters to expectations, it will be difficult for inflation to continue.

In addition, the mid-term congressional elections in November are approaching, and the support rates of Biden and the Democratic Party are losing ground due to inflation. If this summer is missed, Powell and the Federal Reserve will face political pressure second only to 2008. When fighting inflation became the consensus of the White House and the market, Powell could only fight back against it more than expected.

After the interest rate hike in May, market optimists believe that the “Eagle fed” is over and the “interest rate hike will be terminated in September”. Now, it seems that June, July and September are the “Eagle” of the Federal Reserve.

Next, the tightening operation of the Federal Reserve, coupled with high prices of oil, raw materials and food, will launch a more rapid dual core impact on the global financial market. Is it possible that there will be a “wonderful spectacle” like the Volcker era, that is, the Federal Reserve’s interest rate hike has prompted international capital to withdraw from oil futures, the oil price has fallen, the dual core has been broken, and the stock market has rebounded. If the situation of the Russian Ukrainian war has not fundamentally changed, it is less likely that the US dollar will suppress oil prices. The main reason is that Powell may fight against inflation caused by overheated demand more than expected, but he has no intention of taking risks to suppress oil prices. This is one of the conditions for the formation of dual nuclear impact.

Under the impact of the dual core, none of the global stock and bond exchanges will be spared. The stock and bond markets in the United States and the foreign exchange markets in other countries are the hardest hit areas.

Now the US stock market has not reached the most dangerous level, far from the bottom. Why? At present, the stock market is not the most concerned factor of the Federal Reserve. The first consideration of the Federal Reserve is inflation, the second is the risk of US debt, and then the risk of stock market. In the era of easing, the stock market and bond market are the markets with the most serious monetary foam. During the period of austerity, the decline of stocks, especially the sharp decline of technology stocks, is inevitable for the market to clear. Saudi Aramco’s counter attack on Apple’s market value takes the lead, which is a representative work of dual core impact. If there is no circuit breaker, the Fed will not pay much attention to the stock market. In addition, the stock market crash in 2020 has given the Federal Reserve an experience. The Volcker rule established by financial supervision in 2008 acts as a firewall and slows down the speed of risk transmission: from the stock market crash to the BBB debt collapse of enterprises, to the bankruptcy and layoffs of enterprises, and finally the economy falls into recession. This time lag provides a time window for the Federal Reserve to adjust monetary policy.

Foreign exchange markets in other countries have generally suffered from dual core impact. In particular, the yen and euro, as traditional risk averse assets, have been suppressed by the sharp rise in oil prices and become risky assets. This prompted a significant unilateral appreciation of the US dollar index and further hit non US dollar currencies including the yen and the euro. Asian commodity exports were “hunted” by Australia and the Middle East energy, and Asian currencies were forced into a “civil war”. The exchange rate turbulence brings about the risk of repricing national assets. Some countries that have been implementing loose policies for a long time, have high resource consumption and lack, and have high debt risk are prone to the “three killing” of stocks, bonds and remittances. The problem is that international exchange rate risk (non US dollar risk) is not the current condition that restricts the Federal Reserve from implementing aggressive tightening.

The bond market is the real risk. The yield of us 10-year Treasury bonds exceeded 3.44%, the highest level since 2011. The upside down of treasury bond yield is regarded by the market as a signal of economic recession. The logic is that the deposit and loan business of commercial banks is operated by borrowing short and lending long. If the Treasury bond yield hangs upside down for a long time, the market short-term interest rate may be higher than the long-term interest rate, which will lead to the plight of the deposit and loan business of commercial banks. The simplest understanding is that confidence in investing in the future is declining. This has become a risk signal of economic recession.

Inflation is the condition for the fed to end easing, and bond market risk may be the condition for the fed to end tightening.

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three

Currency illusion: investment, consumption and employment will cool down

Today, Wall Street is increasingly worried about the US economic recession and the failure of the Federal Reserve to achieve a soft landing. Next, how the US economy goes is directly related to the operation of the Federal Reserve.

So far, the US economy has experienced a strong recovery from high inflation, and the job market is very hot. This can be confirmed by the macroeconomic data of the first five months in the United States.

The concern of the market is whether the Federal Reserve will collapse the financial market. Let me make a simple deduction. If the Federal Reserve implements the most radical tightening policy in the past 20 years in June, July and September, in which the interest rate is increased by at least 75 basis points at one time, there may be several situations in the U.S. economy: stock market crash (deep decline in the stock market); Disillusionment of currency and cooling of macro-economy; The risk of the bond market has risen sharply, and the sudden “money shortage” has led to a sharp rise in the overnight lending rate and the US bond financing rate; The US financial crisis and the overall economic recession.

Stock market disaster is inevitable. Although the Nasdaq stock index has dropped 30% this year, as long as the Federal Reserve still confiscates its hands, the US stock market has not reached the end. This time, the emergence of the Federal Reserve put option, that is, the timing of bottom reading, does not depend on the stock decline and P / E ratio, but on the night before the Federal Reserve stops raising interest rates.

The disillusionment of money is inevitable. The currency illusion was put forward by Irving Fisher in 1928. Simply put, in the period of monetary easing, people ignored the psychological illusion of the actual purchasing power of money and mistakenly thought they had money and expanded consumption and investment. Keynesians use the currency illusion to explain that monetary and fiscal expansion is effective and can “stimulate” private investment and consumption. Later, Friedman believed that the currency illusion was a “trick” that would eventually be broken. When business owners find that raw materials and wages are also rising, and families find that prices are rising, the currency illusion is shattered. But in reality, the currency illusion is not easy to burst. In particular, when the currency continues to be over issued, the market will have a chasing up sentiment.

So far, the monetary illusion caused by this round of epidemic easing has not been broken. The manifestations of this round of currency illusion include: the federal Treasury has given trillions of dollars in subsidies to ordinary families, the assets of American residents have “increased” by more than $2 trillion, consumption is hot under the pandemic, and prices have risen sharply; Stimulated by demand, enterprises have expanded investment and employment, the job market is booming, and wages and prices are spiraling up; At the same time, real estate investment is booming, and house prices are soaring.

Next, the Federal Reserve’s aggressive tightening is likely to pierce the currency illusion and cool consumption, investment and employment.

First look at household net worth. Two years after the outbreak, the net worth of American households increased, reaching a new record in the fourth quarter of last year. However, in the first quarter of this year, the sharp decline in stocks reduced the net assets of US households by a total of 544billion US dollars, a decrease of 0.4%, and the total net assets of US households fell to 149.3 trillion US dollars.

The growth of household net assets has entered an inflection point, and overheated consumption may cool down. At present, there are some “clues” to the cooling of consumption. Wal Mart and another large retail organization have expressed concern about inventory. Drewry, an international shipping research and consulting organization, found that since May 24, container imports to the United States have decreased by more than 36%.

As consumption cools, so does investment. But the biggest factor restraining investment is that the Federal Reserve continues to raise interest rates. At present, the 30-year housing loan interest rate in the United States has risen to 5.3%. Although the real estate market is still booming, the interest rate increase will further push up the market interest rate, and the investment cost and risk will also rise.

Finally, employment. In May, the unemployment rate dropped to 3.6%, and the new non-agricultural employment was 390000, down from April; The number of job vacancies in April was 11.4 million, lower than the record high of 11.9 million in the previous month. Various employment data are very prosperous, reaching the peak and inflection point. With the cooling of consumption and investment, as well as the dismissal of Wal Mart and other large enterprises during the epidemic, the job market will also cool down.

The disillusionment of the currency has cooled the US economy, but it will not lead to a full-scale recession. The U.S. economy mainly depends on consumption indicators, and consumption mainly depends on employment indicators. As long as the number of unemployed people does not increase significantly, the economy will not decline in an all-round way.

Then came the sharp rise in bond market risk. This is the most important risk signal that we need to pay attention to and is most likely to force the Federal Reserve to end its tightening policy.

In 2019, Federal Reserve Chairman Powell raised the federal funds rate to 2.5%, and the US stock market was teetering, but it was the bond market that finally let Powell “surrender”. In August, there was a short-term upside down in US bond yields; In September, the Federal Ministry of Finance issued a treasury bond to the bond market. The market suddenly experienced a “money shortage”, and the overnight lending rate and the US bond financing rate rose sharply. This forced the Federal Reserve to urgently expand its balance sheet by $500billion to alleviate the liquidity crisis, and then turn to interest rate cuts.

At present, the Federal Reserve has just begun to shrink its balance sheet, but the Treasury bond yield has soared to its highest level in nearly 10 years; Although the Fed is more passive in selling mortgage-backed bonds, Treasury yields are still upside down. Although the federal Treasury has consciously reduced the scale of bond issuance this year, the balance of public debt has exceeded $30trillion. In the first five months, the newly issued treasury bonds amounted to 3trillion yuan, and the accumulated interest expenditure in the first four months was nearly 150billion dollars, an increase of about 25% over the same period last year. As the Federal Reserve raises interest rates, interest rates on US bonds will continue to increase. From June to the end of the year, another 3.6 trillion US Treasury bonds will be due for renewal, and the annual interest payment is expected to exceed $600billion. Recently, the US Treasury Department auctioned three-month Treasury bonds with a bid rate of 1.640%, higher than the previous 1.230%.

During the accelerated tightening period of the Federal Reserve, if the US bond yield hangs upside down and the federal Treasury puts in bond financing, the “money shortage” black swan may take off.

We need to attach great importance to one data, namely, the overnight reverse repurchase funds of the Federal Reserve. The Fed’s overnight reverse repo is the opposite of the PBOC’s operation. The Federal Reserve uses bonds to recover dollars from financial institutions. The term is one day and the interest rate is 0.8%. The recent large-scale increase in this data has set a new record in a row. On June 14, the Federal Reserve accepted the overnight reverse repurchase funds to reach $2.213 trillion.

At present, the interest rate of individual housing loans in the United States has risen to 5.3% and the interest rate of short-term treasury bonds has also risen to 1.6%. Why are financial institutions unwilling to lend to the outside world and want to deposit trillions of dollars into the Federal Reserve to earn meager profits?

One market worry may be that US financial institutions lack confidence in foreign lending and risk aversion continues to increase. This is likely to lead to a sudden “money shortage” in the financial market, that is, a liquidity crisis.

First, the fund is too large. 2.2 trillion what concept? More than 10% of the total amount of broad money in the United States, more than the scale of the two-year contraction of the Federal Reserve. Although the time is only one day, but repeated renewal, long-term occupation of this fund. Secondly, the scale has expanded rapidly and set records repeatedly. Finally, the Federal Reserve is passive and financial institutions are active. This tool is equivalent to giving financial institutions a thorough explanation. In fact, it is easy to induce moral hazard. On the day when financial institutions collectively lay flat and deposited their money in the Federal Reserve, the Federal Reserve would face the dilemma of pushing the wool. It could only lend or expand its table to save the market.

If the “money shortage” black swan arrives, it means that the tightening policy of the Federal Reserve has ended, and it may also turn to easing. As for whether there is a financial crisis or an economic crisis, it is not very likely. The balance sheets of American households and enterprises are relatively healthy. Of course, it also depends on the rescue action of the Federal Reserve. In one case, the Federal Reserve faces a dilemma: big inflation turns into big stagflation, that is, inflation, stock market disaster and bond market risk occur at the same time. At that time, the Federal Reserve may take other distortions: maintaining the federal funds rate against inflation, reducing overnight lending rates and using lending facilities to save the bond market. God knows whether it is effective.

This time it’s different. Watch out for the dual nuclear impact.