Highlights:
1. The US 10-year Treasury yield has soared, the investment environment has changed, and it is no longer possible to invest with the stereotype.
2. The U.S. market has now entered a high-volatility phase, and the probability of it generating extreme returns is very high, and from a historical perspective, this is a major change that has not been seen in a century.
3. The high-wave stage is the most likely stage to produce bubbles, and we may be in a bubble of AI semiconductors right now, and this time is also the time when the "fat tail event" is most likely to occur.
4. In every recession in U.S. history, the unemployment rate has hit a historic low and then started to soar. A recession will cause a spike in unemployment, not a recession.
5. The trading volume of these options transactions in the market, which prevents the downward trend of U.S. stock indexes, has reached the highest level in history.
6. China's labor productivity, which fundamentally determines the trend of the exchange rate, has bottomed out, and the interest rate differential between China and the United States and the operation of China's economic cycle are superimposed, and the RMB exchange rate bottoming out is highly probable.
7. This year, due to low risk appetite, the market has chosen to deposit all its cash in deposits and low-risk bonds, which has also led to the poor performance of risk assets, especially stocks.
8. At present, the A-share market is already at a "cyclical bottom", and the pessimism of the market has been reflected in the stock price.
9. The adjustment of the real estate market is a long-term process, and the recovery is not an overnight process, and it is a cycle of 30 to 50 years.
10. The focus of the real estate market should not be the price of the house but the transaction volume, and it is necessary to form a capital storage and wealth storage system that is active in transactions and the price is determined by the market.
On December 17, Hong Hao, chief economist of Sirui Group, was a guest at the "Alpha Summit" hosted by Wall Street Insights, and made an analysis and outlook on the trend of A-shares, U.S. stocks and Hong Kong stocks in 2024.
Here's a look at the highlights of Wall Street:
Thank you very much for Wall Street, and all of you who have given me the time to share my thoughts on the future.
Are we facing a worse market environment than last year, and if not, why are markets so pessimistic, or why do markets seem to be indifferent to policy?
At the same time, why the Federal Reserve has been raising interest rates since last year and this year, but the U.S. stock market and peripheral stock markets have been rising, these are all very perplexing questions we have encountered this year.
U.S. 10-year Treasury yields soar amid changes in investment conditions
Let's talk about the peripheral situation first, this is the 10-year Treasury bond yield in the United States, this chart has not changed for so many years, until 2023, we see a clear trend, the US 10-year Treasury yield has broken through the 40-year long-term downward trend, so I think if we see this chart, we are still thinking about the current investment environment with the previous thinking model, it means that we still haven't realized.
Now we go to meet some of the people who do financial planners for us, and they often use a 6040 portfolio in a simple and crude way: if you're 40, then I'll give you 60% stocks, 40% bonds, and if you're 60, I'll do the opposite.
This 6040 portfolio is based on the most fundamental assumption, which is the correlation between stocks and bonds. Stocks rose, bonds fell, bonds rose, stocks fell, the two sides showed a negative correlation, until 2020, stocks and bonds both rose. When you have those 7 NASDAQ stocks in your hand and you think I did well in 2021, starting in the second half of 2022, we see that the stocks are falling a lot, and then you want to shift your position to bonds, and the bonds fall more than the stocks. 6040 means that stocks are down 40% and bonds are down 60%.
Of course, in 2024 there may be some changes, after all, the Fed's important monetary policy has made a historic turn.
U.S. stocks have entered a high-volatility phase
We are now in a situation of change unseen in a century, we look at this chart, this is the US VIX curve that friends who do US stocks know, and the US stock implies future volatility.
When we take the data of CBOE from 1996 to the present as a cycle of processing and quantitative filtering, in fact, we can see that this is a very regular cycle of U.S. stock volatility, and each volatility cycle is about 7 to 11 years.
As those of you who follow my research report, I have always emphasized the importance of the 850-day moving average, which is a long-term moving average, with each short period being about three and a half years, each medium cycle being two to three 3.5-year cycles, and each long period being about 10 3.5-year cycles, which is a 35-year long period.
We see a very clear implied volatility in the U.S. market, showing a very clear cyclical change.
As you can see, the first high point occurred in 2001-2002, when the US terrorist attacks and the recession of the market, the market's implied volatility VIX soared to an all-time high.
The second was from 2008 to 2011, during the subprime mortgage crisis in the United States, coupled with a historic downgrade of the US sovereign debt rating.
So finally now, the market is re-entering the cycle of high volatility, and the probability of it generating extreme returns is very high, and it is the most important place for us to consider when you do wealth management planning, because in high volatility, we don't know your rate of return, will it fall at the beginning or end of your medium curve?
But the high-wave phase is the most likely to produce bubbles.
So at this time, looking at next year's market, the market has now entered a white-hot stage, especially for the expectations of the AI sector, as well as the expectations for 7 large technology stocks, we all know that the valuation of these 7 technology stocks is very high, and now there are many friends in Silicon Valley financing, and back to the time of PPT financing, a college student makes an AI PPT and says that he wants to make an AI application, so basically 50 million US dollars to jump financing, so the money is very much, and the risk appetite is very high, but in the market overvaluation stage, the possibility of you achieving a very high rate of return and a very low rate of return are very high, or higher than an ordinary period.
Let's look at another chart, this chart is a long-term chart of the U.S. stock market from 1872 to the present. We also see that the market is also interesting, as the long cycle of US equities bottomed three times in 1939, 1974 and 2009, and all of them touched the bottom of the return cycle. The years 1929, 1956, 1989 and 2000 hit the top of the return cycle, respectively.
Then it's very regular, there is a top and a bottom, which is one of the favorite distributions of returns that we do trading, because you know when he is high and when he is low, therefore, you know when he buys and when he sells, but the condition is that you live long enough, like Warren Buffett.
Each bottom is about 35 years, so each 35-year cycle corresponds to 10 short cycles of 3.5 years, each short cycle of 3.5 years forms a 10.5-year medium cycle, and each sunspot cycle is 10.5 years, why?
We don't have the answer, but we do know that there is a pattern to follow. We know that the sunspots affect agricultural activities, and agricultural activities directly affect the borrowing behavior of the previous agricultural society, if you have a good year and a good harvest, you don't have to borrow, you even have to repay the money, and when the year is bad, you go to borrow seeds and borrow usury to go to the landlord's house to borrow.
We don't know why this agricultural cycle has continued to the present, but human behavior is so magical, a short cycle every 35 years, and now we have entered a high-wave stage again.
We just talked about the stage of high waves is the most likely to produce bubbles, maybe we are now in a bubble, in a bubble of AI semiconductors, and this time is also the time when it is most likely to produce "fat tail events", such as the various AI concept stocks and cryptocurrencies we see now.
If we look at the short-cycle, 6-12 months next year, the question that cannot be answered at the moment is: Will the U.S. economy recession next year?
In 2023, basically all economists believe that the U.S. economy is going to recession, because the Fed has raised interest rates like this, houses can't be sold, house developers don't build new houses, and the inventory of new homes in the U.S. has reached an all-time low, and ours is an all-time high.
Will the U.S. recession next year?
The market cannot reach a consensus right now, and what cannot be decided is whether the US economy will recession next year.
Let's take a look at this chart, many people like to use the U.S. unemployment rate is the blue line to judge, now the unemployment rate is very low, everyone's income is growing very fast, so there is no unemployment, there is no reduction in companies, there is no reduction in income, consumption will continue, and the U.S. economy is 70% of consumption, so the U.S. economy will not recession next year, probably this logic is like this.
But we know that every recession in the U.S. economy is preceded by an all-time low in unemployment and then soars.
For example, when the unemployment rate in the United States soared in 2008, it was already June 2008, which means that it is often in recessions that we start to see a surge in the unemployment rate, rather than a recession that the unemployment rate indicates.
Unemployment itself has no predictive effect, because in macroeconomics, we all know that there are three balances, which are the unification of commodities, the labor market, and the financial market.
The unified balance of the financial market forms an equilibrium price in a market, when the market does not skyrocket and does not plummet. At this time, the market is in a state of reasonable valuation, which is not a certain moment, and then a little less fleeting.
The balance of the great unity of commodities and markets is reflected in the supply and demand of commodities, because there is no way to forge the supply and demand of commodities, and you have no way to forge how much steel and cement you need this year; there is no way to forge how much oil and how much coal you will burn this year, and the demand for commodities reflects the current economic situation.
The unemployment rate of the labor force is a lagging indicator.
Because it is only when the economy is bad that entrepreneurs start laying off employees. It is often entrepreneurs who start to cut people, income begins to decrease, and consumption begins to decrease, resulting in a decrease in aggregate social demand, which in turn affects the reduction of investment, forming a negative cycle.
At this time, the recession is becoming more and more obvious, and the downward pressure is increasing. There is no way for the market to reach a consensus on whether there will be a recession in the United States next year.
I don't know if there will be a recession in the U.S. next year, but I think if you want me to bet on a possibility, I'm betting on a recession, because the market is too optimistic right now.
Friends who have followed my research report know that my famous short-cycle fluctuation chart, the yellow line is the short-cycle fluctuation downward of our U.S. economy, and other lines such as the S&P in the upper left corner, EPS earnings per share growth in the United States in the middle of the left, IP (industrial output) in the United States at the bottom, and the LEI leading economic indicator in the United States on the upper right.
So these indicators all point to a rapid economic slowdown in the United States, and of course we can't see it when we look at the stock market now, and the stock market (which is the blue line on the top left) is still going up, and it doesn't confirm the downward trend of the leading indicators of our economic cycle, which is very interesting.
This is the time when we need to pay the most attention, our expected difference is not included in the market price, if the final difference of the expectation is realized, when a sharp expectation is generated, this is the turning point.
If the U.S. economy slows down or recessions next year, then the most direct response is the Fed's interest rate, and the Fed's interest rate in asset prices is the exchange rate of the dollar.
I don't know how much leverage there is in U.S. stocks, but I do know that in addition to leveraging through this structure, we also see that there is a very popular way to do it now, which is called terminal options.
These options are only 0 to 1 day and expire today, or buy today and expire tomorrow, similar to a lottery.
This year is very interesting, unlike last year, which was in the fourth quarter, and you still need to sell some loss-making stocks and then use the negative or realized losses to offset your tax burden.
However, this year has not been without this problem, everyone is desperately selling Covered Call (covered open positions), so the trading volume of these options transactions in the market to prevent the downward trend of US stock indexes has reached the highest level in history.
So if you imagine next year's trend, if the Fed cuts interest rates next year, and then the dollar exchange rate weakens, we do a cycle adjustment, the yellow line is the US trade deficit and GDP ratio you look at, the yellow line is ahead of the dollar exchange rate cycle 1-2 cycles, which is 3.5 to 7 years.
Then we see that it is obvious that the position of the US dollar exchange rate is very high now, especially compared to their current trade deficit is very high, or the US dollar exchange rate is too strong, reflecting the confidence of many people in the United States and the Fed, but you must know that the Fed has made countless mistakes, including the late cycle of this interest rate hike, and finally led to the fastest rate hike in history, three 75-point rate hikes.
Changes in China's National Balance Sheet
Talking about the situation in China, it is very interesting, what we don't understand this year is why the policy has not been able to stimulate consumption?
If we look at the balance sheet of households, there is an interesting equation in macroeconomics, savings = investment.
We have to save as much as you want to invest, so the accumulation of savings in each period is equal to the accumulation of investments on the balance sheet of our entire assets.
According to a special report by the Chinese Academy of Social Sciences in 2020, the total assets are about 500 trillion yuan, and 500 trillion yuan is actually equal to our average house price in China multiplied by the stock of real estate in China, it's as simple as that.
The total savings are 280 trillion yuan: 55 trillion demand deposits, 100 trillion bonds, 25 trillion wealth management, 20 trusts, and 80-10 billion stocks, all of which are exactly equal to 280 trillion yuan.
Then the rest is equity, that is, the part of our house prices and our assets that have risen is about 220 trillion yuan, so all of them add up to 5 million, which is your net worth.
So the balance sheet of our entire national economy is about 1,500 trillion, and the leverage of our entire national economy is about three times, about 280 more than 290 trillion, M2 is about 280-290 trillion, and GDP is about 120 trillion.
This year, due to our low risk appetite, we have chosen to put all our cash in deposits and low-risk bonds, which has also led to the underperformance of risk assets, especially equities.
A-shares are at the bottom of the cycle
So since last year, we've seen some phenomena that we've never seen in history. We know that savings are growing desperately, and this year it seems that we have saved 30 trillion yuan, and the savings come from the savings of our residents themselves, and also part of them come from the savings of foreign countries that we earn from foreign trade.
So theoretically, we would see that the growth of savings, the growth of M2, and the growth of our trade earnings should be basically synchronized.
At the same time, we used to have a well-known theory that if M2 rises, our entire stock market will rise, but this year's situation is that the growth of M2 broad money is about 10.0 percent, but our stock market is still in a slump.
Let's take a look at the fact that from 2022 onwards, our Wonder All-A Index (red line), trade surplus, deposit balance, and M2 growth have been largely decoupled.
In other words, in 2022-2023, everyone prefers to save money rather than buy things, not only does not consume but also buys stocks, which is obviously the suppression of risk appetite has not been released.
If the appetite for risk remains sluggish, then the market's allocation to risky assets will decrease.
The renminbi exchange rate has hit a cyclical bottom, and in July and August this year, the renminbi exchange rate was around the level of 7.4. So when you look back, especially overseas research, many reports feel that the RMB exchange rate is basically no play, because the interest rate differential between China and the United States at that time was very large, and we see that a lot of capital is not only Chinese capital, but also overseas capital is left in the United States.
So it's interesting to look at the blue line, which has been adjusted periodically. We have seen the volatility of the U.S. market invariably show a 3.5-year cycle, and a medium- to long-term cycle superimposed by a short 3.5-year cycle.
Let's take a look at the blue line is our RMB exchange rate, from 2008 to 2009, the RMB exchange rate bottomed out in 2016, so this is about April to August 2023 when the RMB exchange rate bottomed, and it can be seen that each low interval is about two short cycles of 3.5 years to form a 7-year cycle.
Therefore, at that time, we felt that no matter what happened in the periphery, 7.4 should be the bottom of this round of RMB exchange rate, which was determined by the cycle itself, so we saw that this round of RMB cycle basically bottomed out.
Looking at labor productivity again, the strength of our exchange rate not only shows that our interest rate spread may be good, etc., but more importantly, it is a price for the relative labor productivity of the country.
If a country's labor productivity grows faster than others, its exchange rate should strengthen.
Therefore, if the change in labor productivity bottoms out and rebounds and leads the RMB exchange rate for 12 months, then in the next 6 to 12 months, we should also see the corresponding strengthening of the RMB, then superimposed on the interest rate differential between China and the United States, and then superimposed on the operation of China's economic cycle, etc., then there is a lot of reason to believe that the RMB exchange rate should be the first event that we can determine with a high probability in an uncertain environment, that is, the exchange rate has bottomed out at 7.4.
Why is the market not reacting?
The trend of long-term bonds in the United States is closely related to the trend of our A-shares, and this correlation will not disappear, at this time we can quickly draw a conclusion: if the Fed cuts interest rates next year, or because the United States slows down the recession, the Fed cuts interest rates, then the interest rate differential between the two countries converges, and China's exchange rate warms up, then it is naturally a strong support for our Chinese capital market.
We are now seeing 3,000 just below 3,000, which should be the bottom of the cycle, which is in line with our November outlook for the next 12 months.
Last year, when we looked ahead to the next 12 months, we expected the Shanghai Composite to be between a little bit below 3,000 to 3,500 points, and this year it will actually come out at 2,900 to 3,400, so there's no need to be too pessimistic, especially when everyone is pessimistic.
If we continue to be pessimistic, it will not help this form, and a lot of pessimism has been recorded in the depressed stock price. More needs to be done to make the stock market better, including that we stop being pessimistic.
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