Let's talk about the future!
Let’s review the trend of the US stock market last week. From Monday to Wednesday, it has soared for three consecutive days. On Thursday, it dived slightly, and on Friday, it ushered in a big rise again. As for the reasons for the rise and fall, everything is as we predicted last week. The rise and fall depends on the Fed.
The surge from Monday to Wednesday was largely due to the change in views of the President of the Dallas Federal Reserve Bank Kaplan last weekend. As the Fed's first official to express hawkish views, he has always been a weather vane for hawkish representatives. Over the weekend, he suddenly said that the epidemic is now serious and that he should not rush to reduce the scale of debt purchases. In the eyes of the bulls, since the most hawkish bigwigs are no longer hawks, Powell will definitely continue to dovish on Friday.
Thursday’s plunge was also due to a change in Kaplan’s view, perhaps because the United States has begun to intensify vaccine injections, and the market is no longer worried about the epidemic. Kaplan quickly adjusted his views on Thursday. In his view, although the US economy is currently affected by the recurrence of the epidemic, except for specific industries such as tourism, other major industries have shown a rebounding momentum. Businesses and consumers are gradually adapting to the epidemic. The Fed should announce its decision to reduce QE at its monetary policy meeting in September this year and implement it immediately from October.
When the market heard the news, it jumped straight in response. On the Thursday before the Fed’s speech, many Fed hawkish officials continued to speak out. Even before Powell’s speech on Friday, there were no less than five Fed officials who expressed hawkish views. They all believed that QE debt purchases should be reduced as soon as possible. Signs of diving also quickly appeared.
The financial blog ZeroHedge commented on this, “Supply chain disruption will not be eased in the short term and will force consumer prices to rise. The Fed’s inflation will stop here for the time being. Fed officials generally believe that the market’s confidence in the economy is affected by inflation. The impact of worries, now is the time to withdraw the loose monetary policy.”
Faced with the constant pressing of hawkish officials, when everyone thought Powell might change their views, he once again surprised the market. The Federal Reserve has reached a consensus on reducing QE during the year, and Powell’s time frame is set "within the year" at this time, which is actually a more dovish move.
Fed Chairman Powell reiterated at the Jackson Hole Global Central Bank Annual Meeting that if the U.S. economy continues to improve toward expectations, it is “appropriate” to start cutting asset purchase plans this year. At the same time, he spent a lot of time in his speech to explain why the current high inflation is still "temporary" and that the Fed's monetary policy should not be affected by temporary fluctuations, which is quite unconventional.
However, he still believes that the possibility of raising interest rates is still far away. Powell said that reducing the timing and speed of asset purchases will not send a direct signal to the timing of interest rate hikes. We have clearly stated a different and much stricter test. "He added that although inflation is stable around the Fed's 2% target interest rate, we still have a lot of coverage to achieve maximum employment." This is the second aspect of the central bank's dual mission and is necessary before raising interest rates.
Regarding the pace of monetary policy tightening, Powell still emphasized his desire to see sustained and strong employment growth. Since July, more progress has been made in employment, but the delta strain has also spread further. There is still a long way to go before maximizing employment. The market had generally expected that the Fed announced in September that it would reduce QE and officially implemented it in December. But Powell's speech continued to focus on the speed of employment and economic recovery, and continued to emphasize that high inflation is temporary and more moderate than expected.
Success or failure is a matter of thought. The CNN Fear and Greed Index, the seven indicators of investor sentiment, show that investor sentiment was in a state of extreme fear on Thursday, and after Friday’s stock market hit a record high, it has now become extreme again. The state of fanaticism. From extreme panic to extreme fanaticism, investors completed such a transformation in only one trading day, all because of a speech by Powell.
Powell announced that it might cut QE in the near future, and the market was still beaming. The three major stock indexes collectively surged, which was regarded as a big plus. Some people have explained that this is all the bad news, and the boots have already landed, but before Powell spoke, the U.S. stock market seems to have set a record high. What kind of bad news is this? In fact, the last time it was announced (in 2013) that it would cut QE, that time directly triggered a plunge in the U.S. market.
At the hearing of the Joint Economic Committee of the United States Congress on May 22, 2013, the then Chairman of the Federal Reserve Bernanke publicly hinted for the first time that if the economy can maintain growth momentum, the Federal Reserve will consider announcing a reduction of 850 per month in "the next few meetings." Billion dollars in debt purchases. As a result, the 10-year U.S. Treasury yield, which is the anchor of global assets, soared from 1.66% in May to 3.02% at the end of the year.
We must know that the anchor of global assets has risen rapidly, or even nearly doubled, which has caused the cost of financing in markets around the world to soar, and natural U.S. stocks and other assets have plummeted. This incident was later identified as Bernanke's "major mistake"! Therefore, this time Powell is definitely "learning lessons". He only talked about how serious the epidemic was and said that QE reduction was "possible", and he never mentioned the conditions, timing, and signals of QE reduction. This obviously gives enough confidence and confidence in the market to continue to relax, and it is inevitable that US stocks will rise!
Of course, QE will eventually be reduced. After all, inflation is becoming more and more exaggerated. The White House has torn up the inflation forecast report three months ago and directly changed it to the year-end inflation that may double. Although the Fed has been saying that "inflation is temporary", "the epidemic has limited impact on the economy," "the economic recovery is still underway," and "the U.S. stock market has no bubble", it is actually panicked.
Doesn't the Fed want to tighten monetary policy? Don't they know that this round of rise in US stocks is a bubble? Don't they know that inflation is obviously not temporary anymore? Obviously, the Fed does not know all this. Over the past year or so, the Fed’s balance sheet has doubled, and the strongest money printing machine in history will have side effects on the future economy. It is impossible for these top elites to not know.
But after all, no one wants to be responsible for the new round of financial turmoil in the United States, so there must be an excuse to burst the bubble. Recently, many Fed officials have come out to call for a reduction in QE. However, most of them mentioned that the August employment data is very important, that is, the non-agricultural report that will be released in September. Therefore, if non-agricultural data continues to show substantial improvements, they can find excuses to say that the economy is good and we can tighten the currency.
Life is more important in acting. Using data to prove that the economy is good, this can help me reduce QE and find a backer. "I tighten it according to the data. If the US stock market collapses during the tightening process, it is not mine. Wrong is the fault of the data. Even if there is a major accident, it has nothing to do with me.” So, wait and wait until the data becomes clearer, and let the loose bullets fly for a while. Of course, this is also something the market likes to hear.
Tao Dong, Vice Chairman of Credit Suisse Asia Pacific Private Bank Greater China Region, expressed a view on the future, which is worthy of your reference. I will reprint it here:
I think this is a turnaround in the Fed's monetary policy, but it is not the most important thing. One of the core logics here is also very simple. What we have seen so far is that it reduces the scale of its debt purchases a bit. In fact, the Fed’s balance sheet is still expanding, and the entire liquidity is huge. The fund pool is still increasing, and it is estimated that it will not change from buying assets to selling assets until the beginning of the second half of next year.
So what I think is important now is that the Fed has transformed from a 100% liquidity expansion to escort the market to a two-way monetary policy. The biggest factor is that policy uncertainty will become more and there will be some speculation in the market, so in the end this may bring more turbulence in the market.
The market has reached this point. With such ample liquidity, asset prices have actually been rising, but in another aspect, because its valuation has become higher and higher, people are guilty. If something unexpected happens Events, some emergencies may be related to monetary policy, may be caused by other factors, or may even be related to the epidemic, then this may bring some adjustments, which no one can achieve predicted.
But I think it will happen again and again in the next 12 months. But on the other hand, the amount of liquidity is still very large, and the cost of capital is extremely low. Except for the stock market, the types of assets that can be invested in other places are limited. There is no other investment target to put money down, so wait After this fear disappears, the funds will slowly come back.
In the past ten years, the same thing has been repeated time and time again. In the end, the biggest core logic is that too much money is chasing limited assets. Under the situation that this has not changed, maybe we cannot avoid market turbulence. But asset prices are improving, and I think this general trend still exists.
Let me simply translate this passage, that is, even if the Fed cuts the scale of bond purchases, it only slows down the expansion of its balance sheet. The liquidity in the market is still increasing, and there is no place for funds to go. Will flow to the stock market. Funds will still flow to core assets, so even if there are fluctuations in the future, it will only be noise in the bull market.
In fact, is there a bubble in the U.S. stock market? Everyone has different opinions. On Friday, a piece of news sparked a heated discussion in the market that the total market value of the five major technology giants of FAAMG exceeded the overall market value of the Japanese stock market. The overall market value of the Japanese stock market is US$6.86 trillion, and the overall market value of the five major US technology giants is US$9.4 trillion. Even if Apple is eliminated, there is still US$6.934 trillion.
From this perspective, it seems that US stocks do have a bubble. After all, the five major technology giants, no matter how powerful they are, their annual profits have not exceeded 200 billion US dollars. The profits created by so many listed companies in Japan are almost twice as much as FAAMG's overall profits. Of course, if you look at the price-earnings ratio, FAAMG's price-earnings ratio is more than 30 times, which seems to be a lot cheaper than the technology stocks that are hundreds of times PE in A shares. From this point of view, there is no bubble.
We dare not say whether there is a bubble in US stocks, but the best time for US stocks has passed. This may be a high probability event. Even if the five giants can still rise in the future, it will be difficult for them to replicate the returns of the past. Let’s take a brief look at the comparison between the revenue growth and stock price growth of the five giants in the past two years:
Apple's (NASDAQ:AAPL) quarterly revenue grew from 53.8 billion US dollars to 81.4 billion US dollars, and its stock price rose from 48 US dollars to 148 US dollars. Revenue increased by 50%, and the stock price rose by 208%.
Google A's (NASDAQ: GOOGL) quarterly revenue increased from 39 billion US dollars to 61.9 billion US dollars, and the stock price rose from 1,200 US dollars to 2,866 US dollars. Revenue increased by 59% and stock price rose by 138%.
Microsoft's (NASDAQ:MSFT) quarterly revenue increased from $33.7 billion to $46.1 billion, and its stock price rose from $133 to $300. Revenue increased by 37%, and the stock price rose by 125%.
Facebook's (NASDAQ:FB) quarterly revenue increased from $16.9 billion to $29.1 billion, and its stock price rose from $190 to $365. Revenue increased by 72%, and the stock price rose by 92%.
Amazon's (NASDAQ:AMZN) quarterly revenue rose from $63.4 billion to $113 billion, and its stock price rose from $2,000 to $3,320. Revenue increased by 78%, and the stock price rose by 66%.
In fact, you can clearly see one thing. The growth of FAAMG's stock price in the past two years has been more dependent on the expansion of valuations. To put it bluntly, it depends on the monetary policy of the Federal Reserve. US stocks have doubled from their lows in March last year. This time it only took 354 trading days, the fastest doubling time.
Looking back at history, after doubling, there will be a big retracement. What about this time? Perhaps when the boots really land, the U.S. stock market's retracement is definitely not small. But now Powell decided to continue to release the water, so everyone went on dancing and dancing.
