Yesterday I saw a big V fell into an anxious state due to the rise and fall of the market, and he wrote a long and lyrical essay to recharge his holdings and faith!
As a trader, inner firmness in a confused state does not represent faith, but at most is just helpless inertia; clear market pricing logic is the effective support for the strategy!
one.
After multiple rounds of market shocks, most investors suffered huge losses and began to question their lives, but there is no doubt that the bull market is still here!
The logic is very clear. The three major supports of this bull market: the halving bull of Bitcoin, the incremental bull of ETFs and the easing bull of monetary policy. The pricing of the halving bull has exceeded half, and the degree of easing of monetary policy has a correlation with the incremental flow rate of ETFs.
Once the Federal Reserve starts a cycle of interest rate cuts, interest rate factors will inevitably change asset pricing factors, and the prices of long-cycle forward-priced risk assets will inevitably rise.
two.
But, will the Fed’s [first rate cut] definitely lead to an increase in the price of risky assets?
Obviously not necessarily. For the core logic, please refer to the article Risks of Fed rate cuts
The key lies in the type of rate cuts the Fed is taking:
Crisis rate cuts - harvesting others and blowing up non-economic entities;
Crisis rate cuts - saving the market and blowing up the US itself;
Defensive rate cuts - to save the collapsing building, cut interest rates on the eve of a recession to achieve a soft landing.
three.
How is the US economy? It is true that it has slowed down significantly and is on the verge of recession.
Let's take a look at the core economic data of the United States:
1. PMI 46.8 is below the boom-bust line and is lower than the level before the outbreak:
2. CPI and PCE have normalized. Due to the lag and inertia of inflation, if the real interest rate (non-federal funds rate) does not decline, the abyss of economic slowdown may lie ahead:
3. The data shows that the decline in the US "real interest rate" is not obvious:
4. From the historical data of the “Federal Reserve Balance Sheet”, it can be seen that each conversion between QT and QE corresponds to the dramatic fluctuations in the US stock market:
5. Historically, many reductions in the “benchmark interest rate” have corresponded to the release of risks in the U.S. stock market:
In particular, in 2008, the US lowered interest rates to zero and found that it had no tools to use during the subprime mortgage crisis. Subsequently, QE was innovated, and the risk of the crisis was transferred from the secondary market to the primary market. Such manipulation delayed the occurrence of the crisis, but did not completely solve the legacy of the crisis:
If the current rate cut begins and the Fed is still shrinking its balance sheet (QT) or has not expanded it yet, the rate cut will have a positive impact on risky assets, but it will not be violent. The same is true for crypto stocks.
However, if interest rates are lowered and balance sheet expansion (QE) is implemented, the cancer left over from the 2008 subprime mortgage crisis will only grow bigger in the primary market.
The former's monetary policy is twisted or contradictory, while the latter's monetary policy is smooth but magnifies the risks in the primary market.
On the other hand, it is impossible to continue to maintain high interest rates and shrink the balance sheet, because the data is already on the verge of a crisis;
6. The Federal Reserve's excessive money issuance (money supply) during the epidemic has an unshirkable responsibility for CPI;
7. Sam's indicator is obviously up:
How far off is this prediction of recessions? 100% since 1970!
8. The downward revision of the "non-farm" data by the U.S. Department of Labor is also sounding the alarm that the actual historical data is seriously inflated and there is an actual recession. The current market ignores the inflated historical data and prices short-term data. Will the Federal Reserve be honest and announce an unexpected non-farm data next time?
Four.
The Fed's multiple public statements and CME interest rate monitoring tools have shown that a September rate cut is a foregone conclusion. What are the other core pricing factors?
1. The non-farm data and employment rate data to be released on September 6 will indicate the type of interest rate cut by the Federal Reserve.
[On August 21, the U.S. Bureau of Labor Statistics released the preliminary report on the first quarter non-farm employment and wage census (QCEW) of 2024. The report showed that the total number of non-farm employment in the United States in March was revised down by 818,000, a downward revision of 0.5%, or about 68,000 per month. The report shows that the historical non-farm data in the United States is seriously inflated, and the actual non-farm data has clearly shown the fact of recession]
Powell’s speech after the July interest rate meeting: The Federal Reserve’s dual mission of inflation + employment also reinforced the importance of non-farm and unemployment rates.
2. The interest rate hike of arbitrage currencies triggers a boom in major asset classes.
The “Black Monday incident” on August 5 was triggered by the yen interest rate hike, and the Bank of Japan Governor Kazuo Ueda made it clear at a parliamentary hearing on August 23 that “interest rates will continue to rise when the economy is good.”
3. If the financial reports of the major U.S. stocks are lower than expected, or if the Americans have nothing left to harvest, they will actively detonate the U.S. stocks to harvest the arbitrage foreign capital that has not withdrawn in time in the United States. This will drive the funds from the U.S. stocks to the U.S. bonds and solve the replacement problem of a large number of U.S. bonds that are due.
4. The Fed’s rate cut expectations are lower than expected. See the picture:
5. Crypto-friendly Zhengke will come to power with promised fulfillment and discounted pricing, and non-crypto-friendly Zhengke will come to power with pricing. Will Harris and Trump win? It remains to be seen.
five.
History will not simply repeat itself, and history is worthy of effective reference.
Let's wait and see the end of the 9 major tightening cycles.
How the S&P 500 performed after the Fed’s first rate cut.
P.S：
Ghost story, there is a certain probability that mad cow disease will not be launched until the first quarter of 2025 or later.
six.
Look at strategy from an EV perspective.
Expected rate of return * resource investment - risk loss rate * resource investment = EV
If EV is positive, there is arbitrage space; if EV is negative, there is no opportunity to participate; if EV is 0, it is useless.
After multiple rounds of market shocks, the floating loss of chips is called sunk cost; the strategy that is suitable based on current pricing factors is the opportunity cost (which may correspond to cutting losses, adjusting positions, and going short).
But effective accounting for risk is the strategy’s margin of safety.
seven.
The process of bull market rising must correspond to the distribution of these chips.
The most important thing about the bull market:
For the main players, it is a matter of harvesting more chips before the bull market rises.
For retail investors, it is important to ensure that they have enough chips to enter the bull market and reap the benefits of the cycle.
