Navigating Risks & Certainty at Fed Rate Cut Juncture

Many compatriots in China may not realize that they are standing at a pivotal turning point in history.

The Federal Reserve of the United States, the global hegemon, is about to transition from the previous interest rate hike cycle to a new interest rate cut cycle.

Based on the current market consensus and all public data, it is almost certain that the Fed will cut interest rates in September: according to the CME FedWatch Tool, there is a 23% chance that the Fed will cut rates by 50 basis points and a 77% chance by 25 basis points at the September (Federal Reserve's sixth interest rate meeting of the year scheduled for September 17-18, 2024, with rate decisions and economic outlook.)

interest rate meeting.

There is no possibility of any other scenario, meaning that regardless of the magnitude, rate cuts are definitely going to happen in September.

However, globally, there are two completely different, even extreme contrasting views on the subsequent impact of the "Fed rate cut": The first view believes that each round of Fed rate cuts is the beginning of market collapse, and after each rate cut, there is either a crisis or a mess, which can be supported by the 2008 financial crisis and the 2020 pandemic crash.

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The second view is completely opposite, believing that the Fed rate cut is a huge boost to the global economy, finance, assets, and the real business economy, because according to economic logic and common sense, lower interest rates are beneficial to asset valuations (such as stocks and real estate).

This is easy to understand: if saving money can get very high interest without risk, investors do not need to take the risk of asset price fluctuations to invest in stocks and real estate; on the contrary, if the interest rate on savings is very low, then stocks will seem more attractive even if the price-to-earnings ratio and dividend rate remain unchanged.

The Fed's shift from the rate hike cycle to the rate cut cycle in this round, whether it brings a new disaster crisis or the beginning of prosperity to the global economic environment, objectively speaking, it is uncertain at present, unless guessing blindly: a 50-50 chance, heads or tails of a coin, actually has little practical significance.

Instead of being swayed by market sentiment and various opinions, distracting attention, it is better to focus on some certain risk signals and certainties verified by history and experience.

This article, written on the eve of the Federal Reserve's interest rate meeting in September 2024, will take the sorting out of several risk trends and signals as the entry point, combined with rules and experience, to deeply explore several assets, channels, and opportunities with certain significance after the Fed's rate cut, from the perspective of respecting common sense and logic.

It will also conduct an in-depth, attitude-based, and evidence-based special discussion and analysis of the possible future trends of China-U.S. competition after the Fed starts the rate cut cycle.

Since we are going to talk, let's talk about things that are not seen or heard in the market, right?

Before September 2024, three major events occurred in the international financial market: First, since July, Buffett has continuously reduced his holdings in Apple and Bank of America stocks, cashing out more than $85 billion, while increasing U.S. Treasury bonds by $105 billion.

Second, from reality to data, the expectation of the Fed's rate cut in September has formed a broad consensus, and now it is a question of how much to cut and how to follow up.

Before each crisis, it is basically a situation where consensus is highly unified, and all opposing views and opinions, when looked back, are actually hindsight; Third, in mid-August, the China-U.S. Financial Working Group held its fifth meeting in Shanghai and established a financial emergency contact channel.

This is an emergency contact channel established by the world's first and second largest economies against the backdrop of rate cuts.

Of course, looking at some aspects of China's domestic economic environment is also very interesting: whether it is the economic data of the past three months or the most real economic feelings of countless people, it all points to the expectation that the country will implement economic stimulus from a policy and attitude level, and use major actions to drive the economy.

However, whether it is the central bank's fund management, interest rate adjustments, or economic policies, in fact, since the second half of the year, it is a special state of "relaxed externally and tight internally": policies and statements are very relaxed and positive, but the money supply is quietly tightening.

It seems that the country is also waiting for something?

Observing something?

According to historical experience, the Fed's rate cut will have a multifaceted impact on the world economy.

First, it will intensify financial market volatility.

For example, on July 31, 2019, the Fed announced a rate cut of 25 basis points, which was the Fed's first rate cut after 10 years.

After the rate cut, the European and American stock markets fell sharply for two consecutive days, triggering a global stock market decline.

In particular, the decline in U.S. Treasury bonds reached 5%, and the yield curve of Treasury bonds inverted.

Second, it will impact the stability of international trade.

The exchange rate changes brought by the rate cut will seriously affect the cost of international trade settlement and impact the export markets of other countries.

Especially for countries that have competitive relationships with U.S. export goods, it will intensify trade tensions.

The stability of the global supply chain and industrial chain will be severely affected by the rate cut.

Third, it will increase the global asset bubble.

The rate cut will lead to a reduction in capital costs and an increase in market liquidity, which may push up asset prices.

Once asset prices rise too high, it will form a bubble, and an excess of asset bubbles may burst rapidly, causing a severe blow to the economy.

Fourth, it will trigger market mowing.

Historically, whenever the "tide" of U.S. dollar rate cuts comes, the liquidity of the U.S. dollar will surge like a flood, and it will rush to buy high-quality assets at low prices in various countries around the world, causing huge economic losses to many countries and even bringing political instability.

The Fed has conducted 4 relief rate cuts and 5 preventive rate cuts since 1982.

According to the purpose of the rate cut, the Fed's rate cuts can be divided into two categories: relief rate cuts and preventive rate cuts.

The main difference between the two is whether the U.S. economy has entered a recession at the time of the rate cut.

The former often occurs after the economy has obviously entered a recession and is used to stimulate the economy, while the latter is common before the economy has entered a recession, aiming to prevent the risk of recession.

In the current global economic environment, including our motherland, the defensive posture made is actually a very obvious consensus on this round of the Fed's rate cut, which is a kind of relief.

Especially Buffett's cash is king, the allocation of short-term Treasury bonds, and the action of selling Bank of America stocks (Apple is still Buffett's largest holding) is very representative.

So, for this round of the Fed's rate cut, whether it brings a new round of prosperity or a crisis impact, there is not much significance to argue.

After all, some things can be questioned about character and morality, but there is no need to doubt vision and experience, right?

Of course, before reality gives an answer, everything is possible, how to do it, to successfully go through the cycle and special period, is more worth paying attention to and focusing on.

For China, there are some things with certainty, here is a share for everyone: First is bonds, especially high-quality government bonds.

In a deflationary period, bond interest rates may rise, and the credit risk of government bonds is relatively low, which can provide a relatively stable return.

For example, the yield of government bonds is usually relatively fixed, which can to some extent resist the impact of asset devaluation brought by deflation.

The Fed's rate cut will lead to a rise in U.S. Treasury bonds (lower yields), which is the most straightforward certainty.

The same is true for China.

If the interest rate continues to be lowered in order to stimulate the domestic economy, then government bonds will also rise.

Otherwise, what do people think is the reason for the stubborn bull market in bonds in China in 2024, which makes the central bank and the country headache and needs to intervene?

Although the transaction of government bonds is a typical recession trade, the corresponding economic signals and confidence impact are not very positive, but the logic, rules, and experience are like this.

Second, gold is the only safe-haven asset that is universally applicable in any era in the world.

Gold has a hedging and value preservation function.

In times of economic instability or deflation, people tend to hold gold as a safe asset, and its value is relatively stable, and may even rise.

Bonds are recession trades, and gold is a safe-haven trade.

Then, it is "cash is king" cash and cash equivalents.

In a stage where uncertainty is filled with fog, it is the most worth holding.

Holding a certain amount of cash can maintain liquidity, so that when the market has opportunities, it can be seized in time.

For example, money market funds and fixed deposits of high-credit banks have good liquidity, relatively stable returns, and low risk.

Next, it is the stocks of industries with stable demand.

For example, the essential consumer goods industry (food, beverages, medicine, etc.

), regardless of the economic environment, people's demand for these basic necessities is relatively stable, and the performance of related companies may be less affected by deflation, and the stock performance may also be relatively better.

However, this logic does not work in the Chinese stock market.

Finally, it is the truly high-quality real estate (city, location, supporting facilities, and products are all indispensable).

The high-quality real estate mentioned here is definitely not the old and dilapidated houses that the domestic real estate speculators like most, nor the numerous ordinary commercial houses that are neither fish nor fowl, nor the pseudo-luxury houses that have been packaged and speculated on, but the "good houses" that have stable communities and can withstand the test of the market and time in terms of supporting facilities and products.

Such houses will not be circulated in the normal market, and for the vast majority of ordinary individuals and families, including the groups and funds of real estate speculation, they are basically either out of reach or beyond the threshold.Next, the uncertainty fog has only two directions: in an inflationary environment, not investing does not necessarily mean you can outperform others, but it can guarantee survival and sustainable development.

In a deflationary environment, not investing will definitely outperform 99.99% of people.

Moving forward, regarding the current global consensus on this round of the Federal Reserve's interest rate cuts, combined with the context of the century-long game between China and the United States, there may be some impacts and perspectives that need to be adjusted for our motherland, China.

For the United States, not cutting interest rates at least leaves room for opportunities to draw blood from somewhere.

However, with Russia and Ukraine not being subdued, the U.S. unable to intervene in the Middle East, and its footholds in Africa being removed one by one, there are few places left to draw blood.

The Asia-Pacific region is tightly suppressed by China, and not much can be gained.

If it really has to resort to interest rate cuts, then there is not much to look forward to in terms of the magnitude and efficiency of the cuts.

Thinking from another perspective, the Federal Reserve, with the dollar hegemony and the high interest rate siphoning advantage, if it easily lowers the interest rates, what's the difference from admitting defeat to the whole world, especially to China?

Having been on the throne of the world's number one for so long, wanting to bow down and admit defeat, would it be easy?

The hostility and targeting attitude of the current American political and capital fields towards China, need not be said more, right?

The President of the United States may not be able to control the Federal Reserve's monetary policy, but to a certain extent, it can play an important guiding role in trade, technology, and the economic dimension of cooperation between the two countries.

This is the key to the uncertainty, and without a clear trajectory signal for such uncertainty, there is no possibility to adjust and turn the current "relaxed externally, tight internally" economic management model in China.

And to verify the certainty of this key factor, it is obviously unlikely to be achieved within 2024.

Therefore, for the vast majority of Chinese people, the hard times are expected to continue until 2025, or even longer, and they should be mentally prepared.

Without any moral binding, but it is worth a warm reminder: a gentleman does not stand under a dangerous wall, and gamblers basically do not have a good end.

I do not hope that friends who have the patience to read here will experience the pain of the accumulated profits of a few months being wiped out in an instant.

Of course, the crisis may also extend to many fields.

Since everyone is Chinese, besides their own country being trustworthy, at a critical stage, do not bet your life and wealth on the opponent's side.

Putting money in the bag is the way to go.

Cash is king is the principle, and restraint and caution are the keys to getting through the cycle.

Of course, whether this round of the Federal Reserve's interest rate cut cycle will bring prosperity or crisis will soon be verified by reality.

Time is always the best touchstone.

So, based on the above combing and discussion, what kind of conclusions and inspirations with practical significance and value can be drawn?

At the end of the article, I would like to share some personal thoughts and viewpoints, which may not be correct, but just as a way to throw a brick to attract jade, for everyone to discuss and refer to: First of all, I personally suggest that actively enhancing the risk awareness of the new round of crisis is particularly important.

Especially when mainstream public opinion and viewpoints think that "Federal Reserve interest rate cuts" are good news, and guide various interests, it is actually the time when real financial and economic risks are the highest.

In such a situation, if the actual realization and changes do not meet expectations, it is easy to trigger various unpredictable black swan events, leading to the outbreak of the crisis.

The higher the expectation, the greater the disappointment, that's the meaning.

Therefore, it is very important to be aware of the risk first, and to suppress the impulse to find opportunities and follow the trend.

Secondly, in the stage where the uncertainty fog is filled, discipline and patience are definitely needed.

Don't be in a hurry to take some real gold and silver actions before the fog has cleared.

Although the outbreak of the crisis is sudden, there must be a continuous brewing process before, and this process is often disguised as prosperity.

Japan in 1990 and the United States in 1937 are all like this.

After the key nodes and events, it is necessary to go through a crisis risk observation stage.

Most of the people who fall in the crisis and the wealth that evaporates are those who act at this stage.

Finally, looking back at China, whether it is an individual, an industry, or even a country, it is necessary to be prepared for the mentality and preparation to "fight a protracted war".

The opponent of the United States is not a paper-made hegemony, and it will not easily die suddenly as some people say every day.

Starting from a rational and pragmatic perspective, in the game stage, endurance competition, any contempt and illusion for the opponent are all fatally dangerous.

The opponents that China needs to fight against are none of them are easy to deal with.

Before the opponent's lamp goes out, or before the certainty of the relationship change appears, do not pin some hopes and interests on the opponent's strategy adjustment.

This view is actually very interesting and worth everyone's careful experience.

Next, whether the Federal Reserve will start the interest rate cut cycle and what impact it will bring is actually already in front of us.

If you have drunk all the river water, you don't lack this one.

Keep your composure, cash is king, rational and cautious, is the most important basic cognition to get through the cycle and the uncertainty fog.

Above, this is a special combing and analysis discussion content before the key turning point of the Federal Reserve's interest rate meeting in September 2024.