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In this episode, we discuss the recent macro trends again with Jiang Jinze, Chairman of MuseLabs, a global asset allocation research institution and former Chief Researcher of Binance Research Institute in China. Due to Japan's interest rate hike, global risk assets experienced a flash crash on August 5. Jiang Jinze believes that this is not a typical crisis. Jiang Jinze believes that the current data is not enough to support the view that the US economy is in recession. Therefore, with the US interest rate cut in September, it is possible that risk assets including cryptocurrencies will rise in the fourth quarter. The trend of Ethereum may be similar to that before and after the launch of the Bitcoin ETF. Transcript of the previous podcast: link
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Was the August 5 flash crash an isolated incident? Will it happen again in the future?
When this event first happened, there were many exaggerated headlines and interpretations in the market, such as tens of trillions or even trillions of liquidation. However, in fact, the funds involved in this event need to be divided into two categories. First, the trigger point must be the unexpected reduction of bond purchases and interest rate hikes by the Bank of Japan last week. This operation has not happened in decades, so when it suddenly happened, the market reaction was very violent, and many market participants had never seen anything like it in their entire careers.
Against the backdrop of ultra-low interest rates and the Bank of Japan's long-term provision of global liquidity, the market has accumulated huge risks. Because Japanese funds have long been flowing out to buy high-yield assets such as the US dollar, it is understandable that the market panicked when this situation suddenly changed. Especially against the backdrop of expectations of a recession in the United States, this double blow has exacerbated market volatility. This volatility not only affected the crypto market, but also the global market, and even the foreign exchange market saw an abnormal increase of 12% in the yen in one day. This kind of drastic volatility has not been seen since the financial crisis in 1987.
What needs to be separated is the short-term leveraged positions and the arbitrage positions. One part is the leveraged positions that follow the trend, and the other part is the medium- and long-term arbitrage positions. The reactions and risks of the two are not quite the same. At present, the medium- and long-term arbitrage positions will not be withdrawn on a large scale, while the short-term arbitrage positions have been gradually digested after the incident. In fact, from the chart of the speculative net positions of the yen, it can be seen that the reduction speed of the net short positions of the yen in the past two weeks has been very fast, and the short-term panic of the market on the yen has basically ended.
However, will other medium- and long-term carry trades continue to be risky? Judging from high-frequency data, as of August 5, speculative positions in the yen have turned positive, and the possibility of an accelerated decline in the yen in the short term has been greatly reduced. A 10% fluctuation in the foreign exchange market in the short term is enough to clear all leveraged plates, so a "gold pit" may have appeared in the market at that time.
For the stock market, the situation is more complicated because the stock market itself is a cash flow market. Although changes in exchange rates will have an impact on the stock market, their fluctuations are usually much smaller than those in the foreign exchange market. Therefore, in this context, the foreign exchange market has become a core indicator for observing overall sentiment. As long as the downward trend of USD/JPY stops, the panic in the market should not continue to intensify.
The carry trade in Japan actually has two sides. On the one hand, Japanese investors take advantage of low interest rates to borrow yen and invest in overseas high-yield assets; on the other hand, some investors pledge foreign currency assets and borrow yen to invest in assets in Japan. Although the appreciation of the yen may lead to losses in carry trades, the performance of the bond market shows that there is no large-scale panic or withdrawal of market funds.
Therefore, although the flash crash on August 5 was an important event, it was more like a short-term market fluctuation caused by multiple factors. Whether similar fluctuations will occur again in the future depends mainly on the global economic environment and policy changes of major central banks. However, judging from the existing data, the market has gradually digested the impact of this event.
The August 5 incident does not seem to be a liquidity crisis and is not worth worrying about.
Judging from the performance of treasury bonds and other markets, the so-called unwinding of the yen carry trade does not seem to have really happened, or even if it did, it was not serious. This is more of a market reaction based on emotional panic. Therefore, this incident does not seem to be a typical crisis. If there really is a liquidity crisis, the US dollar should rise, but in fact, the US dollar index (DXY) also fell in the past few days. If there is really a liquidity crisis, all assets, including stocks, bonds, gold, etc., will fall, but this is not the case. Therefore, it can be judged at the time that this was not an event of market panic, at least for large capital players, there was no excessive panic.
There are two ways to interpret this situation: on the one hand, the market may continue to fall until large funds start to withdraw in panic; on the other hand, the stability of these funds also means that the market may have bottomed out. So in this case, everyone can formulate corresponding strategies based on their own positions and trading goals.
Further indicators suggest that this event is not cause for undue concern. Global capital inflows show that despite the market correction, global stock and bond markets have all seen capital inflows in the past four weeks. Even if there is a large outflow from the money market fund market, it may just be due to the withdrawal of arbitrage funds rather than a manifestation of market panic.
From the perspective of asset risk, both safe assets and high-risk assets have seen capital inflows, indicating that there has not been a large-scale capital outflow when the market has fallen. Deutsche Bank's statistics on the changes in capital positions of different strategies also show that the position retracement of systematic strategies is very small, and the position retracement of trend-following strategies is also not large, and the market panic is not high.
Overall, there is growing evidence that the market is not in a state of panic. In the past two weeks, many institutional funds have the intention to buy at the bottom. Therefore, although the market panic has not completely ended in the short term, it can be judged that this panic has overreacted in the short term. As for the possibility of the Bank of Japan raising interest rates in the future, the Bank of Japan's recent statements have shown some softening. In the long run, such a policy adjustment is almost unlikely to happen.
Analyze Arthur Hayes' latest article
Actually, I saw that you compiled and distributed the article by Arthur Hayes (Xiaohei) yesterday, which mentioned a balance sheet of the Japanese government. However, the data used in the article is not the latest, but two years ago. Nevertheless, these data can still be roughly referenced. Some of the views in the article may not be easy for ordinary readers to understand, but some parts make sense. For example, he mentioned that the Japanese government does promote economic growth by suppressing the liability side of the balance sheet, that is, through low-interest financing. If Japan takes the initiative to raise interest rates, it is actually puncturing its own bubble. Considering that the Japanese government's balance sheet is extremely burdensome (equivalent to more than five times GDP), it is unimaginable to increase financing costs.
Arthur Hayes's article mentioned that the Japanese government is one of the largest carry trade participants in the market. If the rate hike really punctures all carry trades, the first victim will be the Japanese government. Therefore, even after the hawkish remarks of central bank officials, the possibility of long-term rate hikes is still low. I think these hawkish remarks are more of a bluff, and sure enough, the central bank quickly changed its tone. In this context, concerns about the return of long-term carry funds are basically unnecessary because the Japanese government will not easily raise financing costs.
The Japanese government not only conducts arbitrage domestically, but also conducts a large amount of arbitrage transactions overseas. Its foreign securities holdings account for about 50% of GDP, about 2 trillion US dollars. This means that the Japanese government and its subordinate agencies conduct large-scale arbitrage transactions overseas, and the scale of private arbitrage transactions may be even larger, so this arbitrage model will not change fundamentally in the short term.
Some parts of Arthur Hayes' article seem exaggerated, such as the Japanese government's carry trade that he mentioned reached 505% of GDP. In fact, the right side is the financing side and the left side is the asset side. It is a bit exaggerated to count both as carry trades. A more accurate estimate is that Japan's foreign securities holdings are about 2 trillion US dollars, not the 20 trillion yen reported by some news media.
In general, although Arthur Hayes's article is a bit exaggerated, it still has some reference value for understanding Japan's economic model and the structure of carry trade. However, there is no need to worry too much or take the "big crash theory" seriously.
Is the U.S. economy in recession?
I think that whether the US economy is in a recession or not may have different conclusions from different perspectives. The media tends to focus on changes in some new data, but ignores the existing data, so it is easy to draw some pessimistic conclusions. Bad news usually spreads faster, so if you only rely on media reports, you may think that the US economy is indeed showing signs of recession.
But from the overall economic situation, the situation may not be that bad. First of all, judging from the existing economic data, the PMI (Purchasing Managers Index) of the US manufacturing industry has been performing poorly. This is because the US manufacturing industry has long faced the problem of hollowing out. The decline in labor skill levels and the increase in wages reflect the plight of the US manufacturing industry to a certain extent. Therefore, unless there is a particularly large change in the PMI, it may not be accurate to rely solely on the PMI to judge the economic situation.
What is more important is to look at the performance of the overall economy. For example, the GDP growth rate in the second quarter of the United States reached 2.8%, which was much higher than expected, indicating that economic activity is still strong. The expected growth rates for the next two quarters are 2.6% and 2.5%, respectively, which also shows that there is no obvious sign of recession in economic activity. In addition, the price level is gradually declining, inflation expectations are under control, interest rates are expected to fall, and although the performance of the job market is not satisfactory, the unemployment rate has not risen off a cliff.
From the comprehensive high-frequency data, the overall economic activity is still in an expansionary state this year, and the economic index also shows that most of the data are basically in line with market expectations. The financial environment index shows that the financing situation in the market is not tight, and it has even been loosened after June. Therefore, from these data, the US economy does not support the judgment of "recession".
The current discussion about recession in the market is mainly focused on manufacturing PMI and unemployment rate. However, in this economic cycle, many classic macro indicators have failed. For example, the inverted yield curve is usually a reliable indicator for predicting recession, but although the US yield curve has been inverted for two years, a recession has not occurred. In addition, the contraction of the base money supply usually leads to a decline in market asset prices, but in the past two years, all assets in the US market have been rising.
To sum up, although some indicators show signs of economic slowdown, overall, the US economy is not currently in recession.
The U.S. economy is not in recession, but why does the 'recession trade' exist?
At present, relying solely on the unemployment rate to judge whether the market has entered a recession is not sufficient. Most data do not support the view of a recession, and there are other reasons why the "recession trade" appears in the market.
One of the important reasons is that the market has placed too much bets on big tech companies. In the past few quarters, the financial data of big tech companies has exceeded expectations, causing the market to have "aesthetic fatigue" with these companies. The core of stock market trading is future expectations. Even if the performance exceeds expectations every quarter, the market will gradually become picky and pay attention to the changes in the degree of exceeding expectations rather than the absolute value. When the market believes that the degree of exceeding expectations is shrinking, even if the overall financial report performs well, funds may begin to withdraw.
Before the second quarter earnings season, the market's expectations for big tech companies were already high, so the actual results still exceeded expectations, but the magnitude was smaller. This caused the market to start reducing positions before the earnings season, especially investors like Buffett began to withdraw funds in June and flow to other areas. In this process, the market switched funds, and the outflow from big tech stocks did not flow into safe assets or fixed income assets, but into companies that had previously lagged behind. This reallocation of funds does not mean that the market's risk appetite has decreased, but is part of a style switch.
This flow of funds actually has little to do with the market's recession expectations. The stock market's decline has more to do with overweight positions in big tech companies than a direct reaction to the recession. Therefore, it is a bit of a misnomer to link the stock market's decline to recession trades.
For U.S. stocks, the continuous inflow of funds is a normal state, which is inseparable from the structure of the U.S. economy. As long as Americans have consumption needs, companies can make money, and dollars will continue to flow into the U.S. stock and U.S. bond markets. Although this model may face challenges in the long run, in the short term, U.S. bonds and U.S. stocks are still relatively safe investment options.
Regarding Big Tech stocks, current market sentiment has begun to reflect on the actual impact of AI technology. Many organizations have questioned whether AI can deliver significant productivity improvements. Although AI looks promising on a technical level, the actual contribution to corporate finances may be very limited due to the open source nature of large models and intense competition. This reflection has also intensified the market's selling pressure on big technology stocks.
To summarize, although the U.S. economy has not entered a recession, the emergence of a "recession trade" in the market is mainly due to concentrated holdings of large technology stocks and adjustments to future expectations, rather than a direct reflection of economic fundamentals.
Will there be a massive rise in risk assets after the US rate cut?
I personally think that in the context of the Fed's rate cut, there is indeed a possibility of a large-scale rise in risky assets, but this needs to be seen in different situations. If the US economic data maintains the current trend and does not accelerate deterioration, then the rate cut will undoubtedly be a positive. However, the expectation of a rate cut in September has been digested by the market in advance. Starting two weeks ago, the market's expectation of a rate cut in September has exceeded 50%, and even reached more than 90% recently. Therefore, even if the rate cut in September is confirmed, the market's reaction may not be too great.
Even with a 25 basis point or even 50 basis point rate cut, the U.S. risk-free rate of return remains around 4.8%. For assets with no cash flows, such as cryptocurrencies, such interest rate changes do not significantly increase their attractiveness. Therefore, interest rate cuts have more of an impact on market sentiment than a substantial increase in liquidity.
In this case, we need to closely observe the changes in market expectations and sentiment. If the rate cut in September is larger than expected, or the forward guidance of Fed officials on future rate cuts shows a clear easing bias, this could drive a bigger market rally. If the rate cut is only the expected 25 basis points and officials remain cautious in their comments, the market may be disappointed and risk assets may not rise significantly.
In addition, if economic indicators suddenly take a sharp turn for the worse in the coming period, showing signs that the U.S. economy is entering a recession, risk assets may not benefit even if the Fed cuts interest rates. Because in a real recession, interest rate cuts alone cannot reverse the economic downturn, and investors may turn to safer assets such as defensive stocks or bonds.
In general, the impact of the Fed's rate cut on the market will depend on the performance of economic data and market sentiment. If the rate cut is seen as increased confidence in the economic outlook, and the rate cut and future expectations exceed market expectations, risk assets may rise massively. However, if the rate cut is only a symbolic move and is accompanied by cautious forward guidance, the market reaction may be relatively flat. Finally, it is necessary to pay close attention to the remarks of Fed officials to understand their latest views on market sentiment and economic prospects.
Why is Ethereum so weak and what will be its future trend?
At present, Ethereum's weak trend is actually very similar to Bitcoin. Before the Ethereum ETF was officially launched, the market experienced a wave of growth, but because the ETF was launched relatively suddenly, the expected hype cycle was short. This is different from the long hype cycle of Bitcoin last year, which resulted in Ethereum not fully benefiting from the favorable macro environment. The launch of this ETF lacked the "right time and right place", so the rise of Ethereum was relatively limited.
In addition, Ethereum also faced selling pressure from Bitcoin during this wave of gains. There were multiple unlocking events in the Bitcoin market, as well as selling by governments and bankrupt institutions, which led to poor market sentiment and suppressed Ethereum's gains. After the ETF was listed, Ethereum, like Bitcoin, experienced a "sell the fact" situation, that is, the market fell after the good news was realized. At the same time, the selling pressure caused by the Grayscale unlocking event further exacerbated Ethereum's decline.
In terms of subsequent trends, Ethereum may replicate the previous trend of Bitcoin. In the early days of the Bitcoin ETF, although the price fell, as the market gradually digested the selling pressure and net inflows appeared, Bitcoin eventually rebounded. Therefore, the future trend of Ethereum may also depend on the unlocking of Grayscale and the subscription of other ETFs. If we can see that the flow of funds for Ethereum turns to long-term net inflows, market sentiment may gradually warm up, thereby driving the price of Ethereum back up.
In addition, there may be some misunderstandings in the market about the expectations of ETFs, saying that the launch of ETFs has attracted widespread attention, but the growth rate may not be as fast as the market expects. Actual data shows that the growth of ETFs has been very rapid, and the current holders of IBIT already include 615 institutions, which shows that the market still has great interest in ETFs. Therefore, despite the recent weakness of Ethereum, in the long run, as the market matures and funds continue to flow in, the price of Ethereum is still expected to strengthen.
