Guo Shengbei believes that since 2008, the U.S. monetary management structure has gradually changed, resulting in a relatively effective separation of the international U.S. dollar system and the U.S. domestic system, and the U.S. dollar will not fall significantly.
The recent topics of U.S. debt, the U.S. dollar, and U.S. economic trends have attracted great attention from the market. U.S. GDP in the third quarter rose more than expected and the U.S.’s path to reducing inflation has also encountered resistance. Will U.S. inflation drop to 2% in the future as the Federal Reserve wishes? ? With the U.S. keeping interest rates high for longer, what about the U.S. economic outlook?
On November 8, Guo Shengbei, president of GSB Podium Fund and former top brokerage executive, gave an in-depth interpretation of the exchange rate market from the core of economic development between China and the United States in Wall Street News’ “11.11 Special Live Broadcast in the Big Coffee Living Room”. The following is from Wall Street I would like to share with you the essence of what I have seen and heard:
Since 2008, the U.S. monetary management structure has gradually changed, making this round of U.S. inflation completely different from the inflation after 2008.
The international dollar system has been divided, which has relatively effectively separated the international system and the domestic system of the United States. In addition, funds have been relatively concentrated in the United States, and the liquidity of the domestic dollar system in the United States is very sufficient.
The structure of the U.S. dollar has undergone very important changes, and the U.S. dollar will not fall significantly.
U.S. stocks will not perform as well as in 2023 in 2024, but U.S. bonds will rise.
The probability of inflation returning to a low level is low, and the possibility of returning to 2% is very low.
It is difficult for the Bank of Japan to completely abandon YCC, and the probability of choosing to continue to relax the upper limit of the YCC yield curve is relatively high.
The difference between the current round of inflation in the United States and the inflation after the 2008 financial crisis
This inflation is indeed very different from the past, because prices soared after 2008. Obviously, fiscal policies, theoretical preparations, and international currency flows are all very different from this round.
This time you can see that inflation is obviously dominated by the United States.and the last round (the round after the 2008 financial crisis) after the United States quickly cut interest rates,Inflation mainly occurs in emerging markets. In addition, there is a well-known difference this time, which is that the interruption of the supply chain, whether it is the time of interruption or the recovery process, is inconsistent among countries. This is a very important change.
It should also be noted that along with the long-term structural changes in the globalized economy, there have also been some important changes in geopolitics. Therefore, these changes are that this round of inflation is completely different from the 2008 financial crisis, or from many previous crises. An important change that makes a big difference.
Changes in the U.S. monetary management structure are one of the main topics today. After 2008, the United States launched a completely different structure from the past. People often discuss whether the amount of U.S. reserves is many, many times greater than before. What is the essential difference?
In fact, the first round of differences has already occurred since 2008: the amount of U.S. reserves has changed from tight to loose, because at that time there was a multiplier relationship between reserves and broad money, and there was also a relationship between broad money and economic aggregates. Multiplier relationship.
However, these situations have fundamentally changed since 2008, soChanges in the entire financial structure began in 2008. In 2020, the United States has made many important adjustments (monetary management structure). Many important current economic behaviors, inflation behaviors, interest rate trends, and exchange rate trends are directly related to this series of changes.
Everyone has noticed that the last round of rapid interest rate cuts in the United States occurred after 2008, when interest rates were cut to zero and rapid QE was implemented. There were many characteristics at that time. One was that the inflation in emerging markets was much higher than that in the United States. The United States did not have corresponding reasonable fiscal policies, or insufficient fiscal policies to support the recovery of the United States. This round is completely different, so these reflects the difference in its structure.
And this time you can see that at the beginning of the 2020 crisis, in addition to rapid QE, the United States also did another thing. It provided a swap line for the financial dollar as an international currency. The picture below is actually a swap line structure. The core of this swap line is some major central banks led by the Federal Reserve, including major central banks in Canada, Europe, Japan, Switzerland, etc.
Changes in the financial structure of the United States
This goes back to the changes that occurred after 2008. When there are sufficient reserves, this sufficient reserve actually theoretically provides the central bank with the price to manage currency, that is, the interest rate, and the amount of currency, that is, This QE can increase base money and broad money.
In the first round, because interest rates were very low at the time, a large amount of money could flow into the world.But the situation was different in the second round. There was a division within the international dollar system. Since the last round of interest rate hikes in 2014, the international dollar has actually been in a relatively short-term state. When interest rates rise, the U.S. domestic financial system has a very sufficient supply of U.S. dollars. Even though there were problems with Silicon Valley Bank some time ago, the U.S. has not stopped raising interest rates, nor has it stopped shrinking its balance sheet. In fact, a big factor is thatThe actual liquidity of the U.S. domestic U.S. dollar system is very sufficient.so through this new round of structural reform,Separate the international system and the domestic system relatively effectively, and keep funds relatively concentrated in the United States..
These methods are very different from before. This is a change in the financial structure.
Over the decades that the international dollar system has existed, as long as it is outside the U.S. financial system and is owned by foreign banks, all U.S. dollars are within this system. Moreover, this system is very large. In the past, it was essentially subject to U.S. regulations. The interest rates are relatively loose relative to liquidity.
The core problem in the past was that the international dollar system was too poorly regulated and too loosely managed, which led to many problems. But as time went by, these problems began to become less obvious than before, so the United States began to adjust the relationship between the two systems.
We just mentioned that since the last round of balance sheet reduction and interest rate hikes in 2014, we have discovered an interesting feature. In fact, the U.S. financial system has always had sufficient liquidity, but a shortage of U.S. dollars has begun to occur internationally, and the U.S. dollar has always been relatively strong. .
The dollar remains strong
In fact, the structure of the U.S. dollar has undergone very important changes. It is very difficult for the U.S. dollar to fall. Even in the future, I do not think the U.S. dollar will fall. This major factor is related to the international dollar system.
The national credit of the United States is completely tied to the U.S. dollar. Under this system, the United States can almost always ensure sufficient domestic U.S. dollar liquidity, while the international U.S. dollar is relatively insufficient. This will make U.S. dollars scarce in the international environment. This state will It has been maintained, so this is an important feature of this round of U.S. financial structure. As mentioned just now, the U.S. has relatively sufficient liquidity. Overnight reverse repurchases were used, because reverse repurchases in the United States are used to recover liquidity. At the peak of this round of expansion, the amount of reverse repurchases reached more than 2 trillion. Even after such a long period of shrinking the balance sheet and such Despite the rapid shrinking of the balance sheet and interest rate hikes, the amount of reverse repurchases is still around 1 trillion. These amounts have provided relatively loose flow of US dollars in the US domestic system.
I think that if the U.S. dollar does not raise or lower interest rates in the future, the probability of the U.S. dollar falling sharply is very small.The U.S. dollar will basically remain relatively strongthe US dollar is affected by several factors. One is the US economy. You can see that it has always exceeded expectations. The core reason is structural changes, so the advantages brought by a good economy are clear.
Second, if interest rates fall, theoretically the U.S. dollar should depreciate. However, this theory depends on the relative marginalization of other countries. Therefore, if we do not explicitly discuss the relative marginalization of other countries, it will directly result from the decline in interest rates. The devaluation of the US dollar itself is questionable.
And as mentioned just now, once the interest rate stabilizes, it will cause funds to flow into the United States. The United States itself will start the process of buying bonds through the monetary base and debt base, and this process will also start. After this start, it will also It will be of great help to U.S. debt and the stability of the U.S. dollar system.
And this process itself is also helpful to the development of the United States. Therefore, if these factors are combined, we should not be pessimistic about the U.S. economy. The U.S. economy will probably not enter a recession. This is my basic judgment.
Therefore, the dollar is unlikely to enter a weaker range. I think the probability of this happening is low, that’s the general environment.
So if the U.S. dollar continues to remain relatively strong next year and the Fed does not raise interest rates, the euro may rise slightly. However, the economic structure of the United States is clearly better than that of Europe, so I have doubts about whether the euro can rise. So Considering that the euro accounts for more than 50% of the U.S. dollar index, the overall probability of the U.S. dollar depreciating is actually very low.
Looking back at other emerging market countries, an important variable is emerging markets. Although the reliance on the US dollar is getting lower and lower, because the debt issuance capabilities of emerging market countries are increasing, a new structure has gradually formed. The dependence on the US dollar has decreased, but the current global currency structure is relatively favorable to the United States, so the probability of a global rise is actually not high. Under such circumstances, I think the probability of emerging market currencies becoming strong is very low.
You can buy the bottom of U.S. debt
In fact, I think the best investment at this moment is U.S. bonds, because after all, the U.S. stock market is also affected by whether the fiscal deficit can expand. Because we predicted at the end of 2021 that there will be problems in the United States in 2022, but there will probably be no problems in 2023. But in 2024, after all, we have just mentioned several potential impacts. One is, after all, whether the deficit in the United States can rise significantly in the election year. , this probability is relatively low.
If the talent deficit cannot rise significantly, U.S. residents’ deposits and corporate profits will be affected to some extent. Therefore, after all, the U.S. stock market is experiencing some relatively abnormal changes. For example, its development is mainly caused by a few stocks. In terms of the power of growth, under this structure, the U.S. stock market is likely to not be as good as 2023 in 2024. I basically have this judgment, but U.S. bonds are likely to be, so I think the increase in U.S. bonds will be very good. , whether it is due to global economic problems or the emergence of some local financial crises, it is possible that interest rates will fall more. Even without these problems, our interest rates remain relatively high, and you get stable high coupons, which is a good investment in itself.
Economic Situation Forecast for the United States: High Growth and High Inflation
The Federal Reserve continues to explore through continuous improvements, making its financial structure more risk-averse and with more obvious advantages. However, from the perspective of the development of the entire country in the United States, we also put forward another point of view. The United States has changed its fiscal structure at the entire national level. , industrial policy and trade policy, so if you understand it from a broader perspective, the United States will basically maintain a higher growth rate.
Second, the inflation rate will definitely be higher than in the past, because of the reshaping of globalization, the United States’ own new industrial policy adjustments, or the return of manufacturing. The Rust Belt is actually on the rise, and all of this has a lot to do with the industrial policy of the United States.
One is high growth, and the other is higher inflation first. So how to avoid high interest rates between the two?
If inflation is particularly high, it can only be managed with high interest rates. This is a traditional economic theory, but this theory itself is not necessary. There are often some deviations. This goes back to how the United States can move towards a higher level in the long term. Growth, higher inflation, and relatively not particularly high interest rates mean that the real interest rate will be structurally negative in the long term. If this result occurs, the U.S. economy will continue to grow.
After raising interest rates, U.S. fiscal problems cannot be ignored
The United States does have several potential problems right now:
First, the issue of commercial real estate in the United Statescommercial real estate issues are closely related to interest levels, and commercial real estate is also related to many new living conditions in the United States after the epidemic. A large number of people have left their main work cities to live relatively far away. These situations have changed the entire American life. The structure of life has completely changed,Therefore, commercial real estate is a structural long-term problem.This will definitely have an impact on the United States.
Secondly,The process of raising interest rates has indeed produced positive factors.Ordinary people do have some extra money to spend, which relatively hinders the impact of interest rate increases.. Another point is related to financial will. Even today, the interest rate in the United States has increased to 5.5%, but the interest rate on general deposits in American banks is basically zero.
When the pressure on the bank’s liability side is not so great, the borrowing costs on its asset side will also rise slowly, not to mention that the loans of ordinary people in the United States will generally be locked in the long term for a long time. The period of relatively low interest rates is locked in, so these things have mitigated the impact of U.S. interest rate hikes. But the U.S. interest rate hike has indeed brought about many potential problems.
Another thing to pay attention to isU.S. national finance problems. Because the duration of the entire U.S. national bond issuance is only sixty months, which is only a few years, which means that a large number of bonds are due to expire and be renewed every year. For example, next year it is reported that the total amount including maturity renewal and newly issued bonds is said to be as much as 7 trillion, so if such a large amount is rolled over,It will bring about a rapid increase in costs to the entire U.S. national finance.
This is why the U.S. fiscal deficit has a structural upward trend. This is why U.S. interest rates have suddenly risen rapidly in recent days. The rapid rise in long-term interest rates also means that everyone has doubts about whether the U.S. government deficit can be sustained in the long term. brought doubts.
The likelihood of U.S. inflation returning to 2% is low
We just mentioned the relationship between inflation and interest rates. The core CPI in the United States has actually started to rise rapidly around 2021, but interest rates, whether it is the federal funds rate or the ten-year Treasury bond rate, have remained unchanged until some rapid increases recently.
Some of the reasons why inflation remains high are structural problems. Long-term inflation will be much higher than before. I think this is almost certain.
Therefore, the probability that inflation will return to the low level before 2019 is very low. So the Fed itself probably knows that the probability of 2% is low. But what should he say?
Because what he should do at this moment is to use traditional theory to make decisions, so after a certain period of time, if the inflation does continue to decline, but does not fall to the bottom of, say, 2%, it can still make some adjustments to the monetary structure and monetary interest rates. adjustment.
During the Double Eleven period, Wall Street Insights Master Class, together with top-notch guests in the market, launched a series of special live broadcasts in the celebrity living room with the FICC system as the core, covering the four major markets of “stocks, bonds and foreign exchange merchants” and sharing insights on macro changes. Thinking and understanding, I hope it can help users and investors better grasp investment opportunities and achieve excess returns.
Tonight at 19:00, the fourth live broadcast of this series will be ushered in,[Long Hongliang, Liu Chenguang]Bond Investment Guide under the Real Estate Change, click to make an appointment to watch >>
Highlights in this issue:
1. What is the current development pattern of the national real estate market?
2. How does the real estate market affect the bond market?
3. How to understand the issue of real estate dollar bonds and urban investment bonds this year?
4. How to understand the bond market trend in the fourth quarter and next year?
Risk warning and disclaimer
Market risk, the investment need to be cautious. This article does not constitute personal investment advice, nor does it take into account the special investment objectives, financial situation or needs of individual users. Users should consider whether any opinions, views or conclusions contained in this article are appropriate to their particular circumstances. Invest accordingly and do so at your own risk.