Directly hit Wall Street | Wang Jinlong, global CEO of Haitou: The US economy has begun to decline, and the inflation effect has not yet fully emerged

Southern Finance all-media reporter Xiang Xiufang reported in New York

In an effort to contain inflation, its highest in nearly 41 years and cool its overheated economy, the Fed continued to raise rates by 75 basis points last week. Subsequent data showed that the U.S. economy was indeed slowing, with GDP contracting by 0.9 percent in the second quarter, the second consecutive quarter of negative growth, in line with a general definition of a technical recession.

Although the outlook is full of uncertainty, market investors once could not wait to cast a more optimistic vote. On the day of the Fed's rate hike and the two trading days that followed, the three major U.S. stock indexes rose for three consecutive days, pushing U.S. stocks to their best month since 2020. In July, the Dow Jones index rose 6.7% cumulatively. The S&P 500 is up 9.1%; The NASDAQ is up about 12.4 percent, but remains in bearish territory.

At present, the US stock market is still in the middle of the earnings season, and concerns about corporate earnings being squeezed by high inflation remain. Will the US stock market face the risk of "killing the performance" after the early "killing the valuation" and then "killing the performance"? "Directly Hitting Wall Street" recently interviewed Wang Jinlong, founder and CEO of Haitou Global, to interpret the latest market trends for us.

The market gets some confidence support from the Fed decision

"Directly hit Wall Street": The Federal Reserve continued to raise interest rates by 75 basis points last week, the US stock market came out of a strong rally in the short term, and the interest rate hike increased the effect of interest rate cuts, how to understand Wall Street's reaction?

Wang Jinlong: The market had a large expectation that the Fed would raise interest rates by 100 basis points, because inflation was not yet under control, the economy was still overheating, and it needed to be suppressed. But from Powell's point of view, one is that he thinks the economy has slowed down, but it has not yet fully reflected in GDP, because the data is somewhat lagging behind. In addition, he feels that inflation has peaked, especially now that oil prices and food prices are falling. Ukraine and Russia have also reached an agreement to allow grain exports. So he thought not to overshoot, just don't go too far, so he dropped 75 basis points. The immediate response of the market is quite optimistic. Everyone is still waiting to see if they can land softly. Because now there is no talk of a hard landing. Overall, it still gets some confidence support from the Fed's decision. There is also the fact that there are some (wanted) bottoms (funds) that have been waiting for signals. They feel that this signal, relatively speaking, is relatively optimistic about the market, and they began to enter the market to open a position, because this year, after all, several major indexes have fallen by twenty or thirty percent, and everyone feels that the valuation is relatively cheap, and it is in response to the sound.

Historical recessions have been accompanied by declines in profits and consumption

"Straight to Wall Street": The US GDP shrank by 0.9% in the second quarter, negative growth for the second consecutive quarter, which has met the definition of "technical recession". But both Fed Chairman Powell and U.S. Treasury Secretary Janet Yellen have stressed that even if it is a negative number, given that the job market is still strong, it cannot be said that the U.S. economy has fallen into recession. In this regard, the comments of some US media are still quite sharp, is this not, can not solve the problem of recession, it is better to solve the definition of recession?

Wang Jinlong: First of all, this is a technical recession, and GDP is negative growth. But his reasoning is that from the perspective of the real economy, the growth of consumption and employment is still relatively healthy, including technology companies and financial companies, or profits, and the profit margin is not bad. Therefore, from the perspective of the real economy, if it does not enter a recession, there may be a delay effect. In addition, if the economy does not slow down, inflation can not come down, the Fed's priorities (priorities), or to fight inflation down, but inflation is a lot of supply-related, now require OPEC to increase production, require Ukrainian agricultural products to be transported, these will have a certain inhibitory effect on inflation. So he's theoretically right.

I say it's a technical recession. Because, historical recessions have been accompanied by a decline in profits and consumption in the entire economy. At present, consumption is still growing, but it is said that consumer confidence is insufficient. The consumer confidence index is now just over 50, which is very, very low, a historical low. But the reason for it is not that everyone has no money in their hands, but that inflation is too strong for everyone to spend money. In addition, what hangs over everyone's head is whether there is an economic crisis or not, and whether I will have a job in the future. So, it's a matter of confidence and expectations, and I think it still needs to wait and see. By September, there may be a clearer signal of where the economy is headed. We certainly want a soft landing, like the third season crawling back, or at least positive. In other ways, the unemployment rate is definitely going to rise, it is best not to rise too high, for example, you double, reach five or six (percentage) points, do not reach 10 (percent) points during the epidemic. And like I said, the market has actually been turbulent for a long time, it has been down for a long time, and everyone hopes to have a positive signal to seize the rebound opportunity.

"Straight to Wall Street": Regarding the recession, I have seen some Wall Street analysts that this recession is a recession driven by inflation problems, and it is different from the previous recessions driven by credit problems.

Wang Jinlong: I think the recession driven by credit is actually a big problem, especially after the subprime mortgage crisis, everyone is doing quantitative easing, the overall debt ratio has risen a lot, including the debt of the state, companies, and households, and the debt has risen a lot, and in the case of quantitative easing, especially zero interest rates, everyone's burden is not heavy. But now interest rates are starting to rise. In fact, not only the United States, like Canada, Europe are raising interest rates, which is a lot of debt pressure, especially some emerging markets, and now have begun to restructure debt. The United States is the same, especially in recent years, the more popular buy now pay later, that is, buy first and pay later, this burden on the family is actually quite heavy, because he is the first to consume and then pay in installments, this bad debt rate rose rapidly. In addition, the mortgage of American families, the interest rate has also risen by half, if you are locked in the 30-year period is fine, if you are a floating interest rate, the burden of interest has doubled. There are also some student loans. The debt cycle has not yet come, but it will come sooner or later, and there is a certain mismatch with the economic growth cycle, it is not the same cycle, but what everyone is more worried about is that all these cycles have rushed together.

I don't think the debt problem is a short-term problem that can be solved, the United States is constantly withdrawing from quantitative easing, but this is a long-term credit cycle, a long cycle of things. Personally, I don't want a debt crisis to happen now, and even if it does, it will be a few years from now, at a stage when the economy has begun to recover and rise. So, I think this recession is a more technical recession, a recession of indicators, but in large part due to insufficient supply, that is, a lot of things that want to buy can't be bought, and then the price is too expensive, you don't want to buy or delay consumption at this time. It may be soft. But this is the ideal situation.

Fed "touches the market to make decisions"

"Straight to Wall Street": At last week's press conference, when talking about the future policy path, Powell said that there may be a more unconventional rate hike like 75 basis points in September, but he also said that the Fed's forward-looking forecast in the future cannot be too clear. For the market, what is the impact of the Fed's choice of a more ambiguous policy path?

Wang Jinlong: Their measure is to touch the market to make decisions, because everyone can't judge it now, just like he doesn't actually admit that he has entered an economic crisis. In this case, one is to judge the inflation index, originally everyone thought that the Fed was actually late, which was a big mistake, because he was too optimistic last year, did not raise interest rates in time, did not withdraw from quantitative easing in time to suppress inflation, because they felt that inflation should end at the end of last year, and the result extended to this year, catching up with the Russian-Ukrainian conflict, resulting in further outbreaks. So, if inflation can be controlled by July or August, there may be no need to add another 75 basis points in September, because its main goal is to control inflation at the expense of economic growth, so it depends on the reaction of the real economy, it depends on the response of the market. Now it seems that the real economy is still growing and can withstand 75 basis points, but if inflation has fallen, such as 5% or 6%, although it is higher than the Fed's expectations, the expectation is 2%-2.5%, but it is already within the acceptable range, there is no need to hit the real economy further. So, I think it can give a range, it's already very good, he can't lock in and say it must be 75 basis points, in fact, there is no need, for me, 50 basis points and 75 basis points are similar, 3.25% and 3.5% Is there any essential difference? There is no essential difference. The key is the confidence in the market and the economy, which is a weather vane. This is something that everyone values more, so the Fed does not dare to take a stand easily, he is afraid of making mistakes.

"Straight to Wall Street": Indeed, because there are still many criticisms of him.

Wang Jinlong: I think Powell's position is still relatively firm, or to serve the economy. But he is more reactive, it is to see how the market is, and then how the economy is, I do something, he can't be reactive, do these things in advance, because he has no way to judge. The Fed's responsibility is actually relatively large.

"Straight to Wall Street": Although the Fed has always defended its position. But there are indeed former US Treasury Secretary Summers, Allianz chief economist Elian, etc., and some well-known economists have criticized him a lot. Like you just said, the Fed's policy is basically reactive now, touching the market to adjust, so its role as a forward-looking policy guide seems to be slowly losing?

Wang Jinlong: It is true, he does not want to take responsibility. In addition, the Fed is actually a service agency, which serves the financial market, although it has certain regulatory responsibilities, but it is mainly a service agency. So, I think it's impossible to make everyone happy. Economists can be irresponsible, but from a regulatory point of view, you can't just say anything, you can't say anything, because the market will react badly. From our investor's point of view, all kinds of predictions must be made, under what circumstances should we adjust the asset allocation, how to hedge your risk, and what kind of expected returns can be obtained. So I don't want the Fed to swing wildly.

Many companies have not yet reflected rising costs

"Straight to Wall Street": After the policy decision came out in July, the market reaction was relatively optimistic. Is it possible that the market is actually too optimistic? Because there are still many people who believe that the US economy is already slowing down, the impact of the slowdown will eventually be reflected. Inflation hasn't necessarily peaked either, and the pressure on corporate earnings remains in the short term. Will the US stock market face the risk of "killing performance" after encountering "killing valuation" in the early stage?

Wang Jinlong: It's possible. Because the performance of many companies does not reflect the current cost increase. In some traditional industries, such as the food industry, the price of raw materials has risen in price because it can follow the price increase and also promote inflation. There are also some relatively no price in, for example, the rise in the salary project, and the rise in the company's debt just mentioned, in fact, everyone has added a high leverage, the original zero interest rate when you do not feel the financial burden, because you do not have to pay interest, and then your repayment time is pushed very low. Now, when interest rates rise, their cost of interest payment will increase a lot. The market is also reluctant to give them a refinement, that is, you can roll out the loan to the back, and now the rollover is relatively difficult, because the banks and financial institutions also have to control their own balance sheets. Many have a delay effect. This effect is not currently reflected. So just now I said, I hope that this credit cycle will be pushed back as much as possible, the more delayed the better, not to overlap with the current economic cycle, but in fact, they are linked, there will be an interactive effect. We can't judge the final effect now, but I agree with you, the economy does not reflect its overall comprehensive cost, and the final yield will still fall, and the profit will still fall. However, whether it will become negative, I think it is still not clear, there is no signal that the company is going to start losing money.

Hit Wall Street: So, the third and fourth quarters are more time nodes worth observing.

Wang Jinlong: It's relatively optimistic, so a lot of people think that the recession will come next year. But my judgment is that maybe the recession has started now, and from the technical indicators, it has really started to decline.

For more information, please download the 21 Finance APP