Market dollar rate cut = financial market correction? This is not a fixed logic, the biggest premise variable is the state of the US economy! Potential crisis brought by the dollar rate cut!

At the Jackson Hole Conference, Powell raised the issue of monetary policy shift, and central bank leaders from various countries reached a consensus.

After the first rate cut in the United States, other countries will gradually begin to cut interest rates, or gradually increase the frequency and magnitude of rate cuts. The era of global rate cuts has arrived, but potential risks still exist.

We often talk about the risk of a correction in the financial market brought about by the US dollar interest rate cut, but this is not a fixed logic. Under the premise, the US dollar interest rate cut encourages the prevalence of speculative assets in the financial market, which is a positive.

But the potential risk is the global economy, yes, the stability of the global economy, not just the United States itself.

Once the economic resilience of various economies, including the United States, is in question, it could lead to economic collapse and financial crises in local areas at the very least, or a global financial tsunami at the worst.

Therefore, there is no fixed logical relationship between the initial stage of interest rate cut and the correction of financial markets.

Let's take a look at the complex impacts and potential crises that a US dollar interest rate cut may bring to the financial market:

1. Risk of asset price fluctuations.

●Stock market volatility: The reduction in borrowing costs brought about by interest rate cuts often stimulates the rise of risk markets. At the same time, the reduced borrowing costs will make the financing environment of enterprises better, and their stock prices will be boosted to a certain extent. However, the current interest rate environment and the magnitude and frequency of the initial interest rate cut should be considered. With the current first interest rate cut of 25 basis points and the premise that whether there will be subsequent interest rate cuts has not yet been determined, the effect of the first interest rate cut may not meet investors' expectations. Once expectations are not met, it is very likely that investors will be disappointed and the market will fluctuate downward.

● Real estate market: The lower borrowing costs brought about by the US interest rate cut may stimulate the recovery of the real estate industry, and stimulate the demand and price increase of real estate. However, based on the current situation of the US real estate industry, the first interest rate cut may hardly stimulate demand. At the same time, many Americans also believe that the current real estate prices are too high. Once the interest rate cut pushes up the housing prices again, it is very likely to cause a real estate crash, which is also a potential risk. I have discussed real estate issues in the comment area of ​​American bloggers many times, and the feedback I received was not very ideal.

2. Bond Market Risks

● Yield curve inversion. There is no need to explain this issue. The US dollar interest rate cut will increase the sales of long-term bonds, and the yield will directly decrease. Since short-term bonds are directly affected by the current interest rate, the yield will also tend to decrease steadily. Excessive purchase of long-term bonds in the short term will cause the yield of long-term bonds to be lower than that of short-term bonds, resulting in an inversion, which is regarded as a risk of economic recession.

However, from last year to now, the long-term and short-term interest rates in the United States have been in an inverted state, and it has remained peaceful for so long. Although many people have raised doubts and risks, they are still ignored by most retail investors in the market.

But ignoring does not mean zero risk. I have written an article before about the inverted long-term and short-term interest rates. Although this does not seem to be a problem at the moment, it has seriously led to insufficient liquidity in the U.S. Treasury market and excessive tension in sentiment.

The 10-year U.S. Treasury bond, which serves as a barometer of the financial market, currently has a yield of 3.795%, while the short-term U.S. Treasury bond yield in March was 5.04%. The U.S. Treasury bond yield in January was 5.51%, and in June it was 4.92%, which is basically a large interest rate inversion.

This interest rate inversion may exacerbate the gap between long-term and short-term interest rates in the short term after the US dollar begins to cut interest rates, thereby further exposing the existing problem of long-term and short-term interest rate inversion, which is also one of the potential risks.

As for why there is no problem with the inverted long-term and short-term interest rates, it is because of the intervention of the external market. Previously, American economists broke the news that the problem of the inverted long-term and short-term interest rates was covered up due to complex factors such as personal lending business. This method is similar to the real estate crisis that broke out in the United States in 2007, which was then covered up until the subprime mortgage crisis in 2008 and 2009. These are all the factors of greater crisis caused by the attempt to cover up the problem in the early stage. Of course, they are also gambling that the crisis will pass smoothly.

● Widening of credit spreads:

Although interest rate cuts will lead to lower borrowing costs, once the economic outlook is not optimistic, investors may have certain concerns about the repayment of corporate bonds, especially high-yield bonds, which may directly reflect the corporate default risk that investors are worried about.

To put it bluntly, once investors are not optimistic enough about the economy, they may worry about corporate defaults and thus shift from high-interest, low-credit-rating corporate bonds to low-interest, high-credit-rating government bonds. Short-term selling may also cause corporate risks such as bank runs.

3. Exchange rate fluctuations and capital outflows

● Risk of US dollar depreciation:

The most direct impact of the US dollar interest rate cut is the depreciation of the US dollar, and the depreciation of the US dollar may affect the outflow of US dollar capital. Once the US dollars in your hands are likely to depreciate in the future, many people will inevitably choose to sell US dollars or convert them into other assets. At the same time, the reduction in the cost of US dollar borrowing will also allow many capitals to use a large amount of "cheap dollars" to acquire more valuable assets around the world.

In our cognition, the US dollar is currency, but as I mentioned in my article yesterday, if the US dollar is not traded, it is just currency, and its value is not enough to support the current low level. What supports the current low level of the US dollar is the high-speed circulation of the US dollar, which is the US dollar capital.

In the eyes of capital, truly meaningful assets are often land, mines, energy or enterprises around the world, or certain rights. In the definition of currency, the issuance of M is often compared with the corresponding national assets. Only in this way can your currency have value. Once the currency you issue exceeds your actual asset evaluation, your currency will depreciate. Therefore, once the US dollar interest rate cuts, many top capitals will wait for opportunities to acquire cheap value assets around the world.

Historically, many times, due to the QE that came after the interest rate cut, the US dollar swept the world, frantically buying assets and international bulk products, causing the prices of bulk products to be hyped up several times. After the price exceeds the premium, the resource-demanding countries will bear the cost risk brought by the premium, that is, inflation. Large-scale inflation may cause the collapse or even recession of local economies. This is a good time for US dollar capital to buy at the bottom, but it is also a crisis, because once a country like Japan collapses, the impact will not be limited to a small region, and may even trigger a crisis in the United States itself.

At the same time, the large outflow of US dollars from the United States will also reduce the liquidity of US dollars in the United States, which may trigger a financial or economic crisis in the United States itself.

Currency Wars:

At the Jackson Hole conference, after Powell announced the first interest rate cut, central banks around the world began to announce that they would cut interest rates or continue to cut interest rates. This was not because they wanted to follow the pace of the United States, but to respond to the risk of currency war caused by the US dollar interest rate cut.

The United States is also a major exporting country. Once the dollar depreciates, the competitiveness of its dollar-exported goods will increase. In order to improve the competitiveness of their products in foreign trade transactions, countries must simultaneously adjust their monetary policies to improve the competitiveness of their products. This kind of competition may not be healthy in the end, and may even become vicious.

Because I mentioned in my article yesterday that if the US dollar wants to ensure that its value does not depreciate too quickly, it must increase the liquidity and speed of the US dollar, that is, the transaction volume and proportion in foreign exchange, and also the proportion in global commodity settlement. At present, this proportion is gradually being eroded by the "small circle" culture. It is very likely that in order to ensure that the US dollar can continue to weaken, several mainstream currencies in the world may accelerate the pace of interest rate cuts to improve the competitiveness of global commodities. And this action undoubtedly magnifies its own crisis. Any competition is risky. This is the potential risk in potential competition.

IV. Inflation and Financial Stability Risks

Inflation:

The inflation problem has been plaguing the United States for many years, and the economic harm it has brought is very serious. At the Jackson Hole Conference, Powell mentioned the harm that inflation has brought to the United States many times, and also cited the epidemic period as an example to list a series of risks brought by inflation. Once interest rates are cut, inflation may rebound, which is also a problem that the Federal Reserve is more worried about.

Although the current inflation in the United States is relieved from the supply side, it also brings the risk of deflation. Once the prices on the supply side continue to decline, combined with the depreciation of the US dollar after the interest rate cut, it may trigger more deflation risks. Inflation and deflation are actually not far apart. A healthy economy requires balance rather than extremes. This is also a potential risk.

Financial leverage risk:

The interest rate cut means a lower lending rate, which encourages borrowing, which may lead to a large increase in leverage in the financial system. Increasing leverage increases the severity of the game, so once the interest rate cut environment or even QE arrives, the financial derivatives market will also experience large fluctuations. This fluctuation is more reflected in the derivatives rather than the investment target itself. Taking BTC as an example, if the spot daily transaction is 1 billion, then the game in the perpetual or futures options market may be at the level of tens of billions.

Once a leverage game war breaks out in the financial market, the losing party may trigger various chain reactions. The most direct one is the liquidation of various pledged positions, which will bring great volatility to the prices in the spot market.

Of course, we don’t need to worry about this problem for now, because the effect of the first interest rate cut is still weak. This problem will only be exposed after three interest rate cuts or QE.

5. Emerging Market Risks

●Foreign exchange debt pressure:

In their previous development, many countries, in order to integrate into the global environment and due to their own lack of autonomy, have made their entire national economies dominated by the US dollar. The country reserves a large amount of US dollar foreign exchange. At the same time, the country itself lacks valuable assets, so it issues various bonds with a large amount of US dollar foreign exchange. Once the US dollar depreciates, the problem of debt repayment will be put on the table. The country's US dollar foreign exchange reserves will depreciate and the repayment capacity will be reduced. If the country lacks its own economic growth, it will face the risk of bank runs or even bankruptcy, and may even trigger geopolitical issues and lead to the collapse of the economy.

This is a good time for US dollar capital to buy at the bottom, but at the same time, if the collapse of the economy has a large impact, it will also trigger a "butterfly effect". This risk is not a big problem at present, and the initial interest rate cut still leaves many companies with ample time for regulation.

● Unstable capital liquidity:

As I said before, once the US dollar rate cuts, a large amount of US domestic capital will wait for the opportunity to move, waiting for certain economies to collapse to buy at the bottom, and even actively targeting certain economies for large-scale purchases. This purchase will bring short-term prosperity to certain regions, and the prices of real estate, land, and resources will rise. It seems to be a great time, but the US dollar capital is for profit, and they will sell heavily in certain positions.

Many times in history, many economies were excited to see the inflow of US dollars, and thus cooperated with various investments and purchases of US dollar capital. However, they did not know that once the US dollar capital was withdrawn, all that was left was a mess, or even a terrible sight. This is a way of capital plunder in financial warfare, and it is also an open conspiracy. It is difficult to refuse and must bear the risk.

Of course, this is also not an issue that should be considered in the initial interest rate cuts, but it is also a potential problem that needs to be addressed in the future.

6. Financial markets are concerned about policy uncertainty.

●The financial market is concerned about future policies, which is also an issue we need to focus on.

After the US dollar interest rate cut, it is more like a global ebb, and it is clear at a glance who is wearing pants and who is not. This is a stage in which the collective exposes its own crisis and tests its own economic resilience and economic regulation capabilities.

The biggest crisis of the US dollar interest rate cut is the global assessment of the US economy. Although current data supports the possibility of a soft landing of the US economy, the actual situation may not be so ideal.

Especially for those who are American capital, their reactions show some concerns about the future of the US economy. Although Trump's coming to power has attracted much attention, and many people hope that Trump can complete a "revolution" in the United States, this is also difficult.

If a person is sick, you can use drugs of high doses, and if the disease is serious, you can even use higher doses of drugs. However, if a patient has been ill for a long time and has multiple diseases, if you use strong drugs, it may not save his life, but only accelerate his "death".

Governing a big country is like cooking a small fish, and the same is true for economic governance. What the economy needs is not extremes, but balanced, healthy and orderly development. Many middle and low-income people in the United States hope that Trump can change the current situation and bring them hope. Similarly, the high-yield capitalist class in the United States is also very resistant to Trump. They do not want change because change may weaken their ability to suck blood.

This political uncertainty, economic policy uncertainty, and uncertainty in global status are the biggest potential risks of this US dollar interest rate cut. Once problems arise in these areas, it will trigger a very large crisis.

Based on the above statement, let's take an example of the environment in which the US interest rate cuts were accompanied by stock market declines in the past 20 years:

1. January 2000, the first rate cut by the Federal Reserve after the Internet technology bubble

In the early 1990s, as the contradictions caused by the disintegration of the Soviet Union were resolved during the Cold War between the United States and the Soviet Union, the United States lifted the ban on Internet technology under the competition between the two sides, which led to a global Internet boom. As the bubble formed and burst, investors' expectations for economic recession increased, and interest rates were cut for the first time under such circumstances, and the S&P 500 and Nasdaq fell sharply.

2. September 2007, the first interest rate cut during the subprime mortgage crisis

In the first phase of the subprime mortgage crisis, along with the US interest rate cuts, US capital began to cover up the high-risk business of the real estate industry, using the 0 down payment method to continue to prolong the life of the real estate industry, which eventually led to the subprime mortgage crisis in the United States. Its involvement extended from real estate to finance and all finance, and even led to an economic crisis.

In the early stages of the interest rate cut, the market rebounded, but when the economic crisis first emerged, the stock market began to fall until the financial crisis broke out, when the stock market fell sharply. This was also because the capital had previously excessively concealed the real estate crisis, which led to increased financial risks.

3. In July 2019, the Federal Reserve cut interest rates for the first time during the economic expansion.

In 2019, the Federal Reserve cut interest rates for the first time since the financial crisis in 2008, and the economy was in a period of expansion. In the initial stage, the market was more cautious about the economy, but as the situation developed and the subsequent outbreak of the epidemic, investors' concerns about the economic outlook led to the market's initial steady decline into a continuous decline. There was even a stampede.

This is the process of investors' confidence in the US economy turning into loss of confidence, and also the result of the optimism during the US economic expansion phase turning into pessimism about the possible US economic recession.

In view of this rate cut, I think we can refer to 1.3. Two situations, 1 is a typical technology stock bubble, and 3 is whether the economy is optimistic after the recovery from the epidemic. In view of the lessons learned from the past, the market may not be as optimistic as we think.

Summarize:

Although the US dollar interest rate cut does not have a direct and fixed logical relationship with the risk market correction, it is closely related to the US economy. The times are progressive, and market expectations are also accumulating experience. With the first technological crisis in the early 2000s and the expectations of interest rate cuts during the expansion period in 2019, this interest rate cut may have more uncertainties.

Although the first rate cut is good news for risk markets and the world, it is also a double-edged sword, and the benefits and negatives it brings are relative. In my personal opinion, although this rate cut seems optimistic, its risk factors, coupled with the uncertainty of the election, I think it is still not optimistic.

I think we all should treat current market sentiment rationally, make reasonable judgments about the future economy, be optimistic about the market, and at the same time not forget the potential risks.

The above content is just my personal opinion based on the data I collected. There may be many shortcomings in it. I hope everyone can give more criticism and suggestions.

————Respectfully, Cat Brother
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