Scientists say there is no time in the universe. However, on Earth, we are not only affected by the central attraction, but also influenced by time. For example, "Stock God" Buffett enjoys the compound interest benefits brought by "time", while we are currently suffering from sho

Scientists say there is no time in the universe.

However, on earth, we are not only affected by the central attraction, but also influenced by time.

For example, "Stock God" Buffett enjoys the compound interest benefits brought by "time", while we are currently suffering from short-term fluctuations in the stock market.

We cannot stand at the end of our lives, so we will review whether today's choice is right or wrong, because we cannot change tomorrow, and we can only make the most reasonable choice rationally at the moment, in order to achieve the best ending in the future. At this time, history is our best teacher.

Recently, global stock markets have suffered a sharp drop, funds have been avoided and the prices of risky assets have dropped sharply. In such an environment, how should we make the right choice?

First of all, we need to understand the source of all this.

Quantitative tightening capital suction

"Quantitative easing" is the most frequently heard word in the past decade, and everyone is also accustomed to the slow bull and fast bull in the stock market under the global loose capital policy.

However, under the high inflation pressure in Europe and the United States, central banks in Europe and the United States have begun hiking interest rates in , which has led to a shift in funds and the words have also changed. The most common thing I heard during this period is "quantitative tightening".

S&P 500 index , Dow Jones Industrial Average (DJI.US) and Nasdaq index have fallen by 18.65%, 15.20% and 23.42% respectively since the first interest rate hike in the Japanese round of Fed on March 17; in the European stock market, the UK FTSE index fell by 7.02%, the French CAC index 11.89%, and the German DAX index fell by 15.21%; in the Hong Kong dollar market, which is pegged to the US dollar, the Hang Seng Index (800,000.HK) fell by 22.00%, and the Hang Seng Technology Index (800700.HK) fell by 27.15%.

The reason why global stock markets were short-squeezed is related to The Federal Reserve's interest rate hike and the reduction of the balance sheet to absorb funds, as well as the rise in the US dollar exchange rate, which triggered safe-haven funds.

against a basket of major currencies index is now at 113.56 points, 17.49% higher than the 96.659 points when the Federal Reserve launched the rate hike cycle in March 2022, the highest level since 2002.

can be seen from the above figure that in addition to this upward cycle, the US dollar index has experienced two additional cycles in the past fifty years. Let’s take a look at what happened in the previous two US dollar cycles and what caused the US dollar exchange rate to turn.

Analysis of the correlation between the US dollar

exchange rate trend and interest rate hike cycle in the past fifty years

In the 1980s, the US dollar index experienced the steepest increase and once broke through the record high of 160 points (see the figure above). Compared with this, the current 113.56 points is only a small matter.

In the late 1970s, the second oil crisis of occurred. The price of crude oil rose from US$13 per barrel in 1979 to above US$40 in 1980. It was mainly caused by the two major oil suppliers' suspension of oil due to a certain incident, while other major oil producers had differences on production plans, resulting in sharp decline in supply and widening supply and demand gap.

The high energy prices triggered a surge in U.S. inflation, which once reached a high level of 13.5% in 1980. Is it familiar with the current plot?

Paul Volker, who served as chairman of the Federal Reserve in 1979, advocated a strong dollar to deal with inflation.

But by 1985, the strong dollar began to damage US trade (in comparison, American consumers who benefited from the strong dollar certainly prefer to buy lower-priced foreign products with US dollar wages. Similarly, expensive American goods are no longer popular in overseas markets), see the figure below, the current account to GDP ratio reached a stage low around 1985-1986.

In September 1985, the United States signed the square agreement with the United Kingdom, Japan, the Federal Republic of Germany and France, agreeing to jointly intervene in the foreign exchange market - that is, sell the US dollar in a large number of sales in the international foreign exchange market to reduce the exchange rate of the US dollar against major currencies. Meanwhile, the Fed began to relax the monetary policy to adjust the exchange rate in order to reduce the attractiveness of the US dollar to capital.

can be seen from the chart. After reaching its peak in 1985, the US dollar index began to decline.

In 2002, the US dollar index rose again, once breaking through the 120 point level.

The main factors that triggered the US dollar rise this time may include: 1) strong economic growth, 2) emerging economies financial crisis triggered funds seeking US dollar hedge, and 3) high interest rates.

On the other hand, the Asian financial crisis in 1997 and 1998 triggered international risk funds to flee from emerging market currencies and switch to the safer US dollar. The federal funds rate reached a nine-year high of 6.50% on May 16, 2000, making it a pretty ideal safe haven for risk funds.

However, the Science and Technology Bubble burst, the Federal Reserve launched a interest rate cut cycle on January 3, 2001, and the US dollar index began to fall at a high level in 2002.

In addition, emerging markets led by China have developed rapidly, which has also attracted investment from international funds. The attractiveness of the US dollar has dropped sharply and the US dollar index has declined.

Learn from history. The strengthening of the US dollar is closely related to the Federal Reserve's interest rate hike. The higher the difference between the interest rate in other developed economies, the more funds can be attracted. In the second US dollar cycle, in addition to the interest rate hike, the higher the US dollar index is also an important reason for the rise in interest rates.

So in summary, the key factor driving the dollar higher is the relative attractiveness of the dollar: this includes the potential return space for US dollar assets that can bring about by the growth potential of the US economy, the difference between US dollar interest rates and other currencies.

From the above two examples, the US dollar enters a downward cycle mainly relies on two actions: interest rate cuts and monetary policy relaxation, which triggers smart funds to transfer to assets with higher returns; if this practice is not effective or requires increasing the formula, use the power and the strong bargaining power of the US dollar to get partners to assist. The Plaza Agreement is an example.

What are the similarities and differences between the current dollar cycle and the past

?

The same thing is: Like the past two times, it was triggered by the Fed's interest rate hike.

Of course, other major developed economies are now entering a cycle of interest rate hikes. For example, the Bank of England started hikes in December 2021, earlier than the Federal Reserve's March 2022, and has raised interest rates 7 times in total, but the interest rate hikes are not higher than the Federal Reserve. The current interest rate of the Bank of England is only 2.25%, which is still a gap of up to 1 percentage point from the US federal funds rate 3.00%-3.25%.

At present, the market expects the possibility of the Federal Reserve raising interest rates by 75 basis points next month to rise. Considering that the rate hikes in other developed economies may not necessarily reach this level, the spread between the US dollar interest rate and the central bank interest rates of other developed economies entering quantitative tightening has widened, triggering funds to seek safer and higher yield assets, such as US Treasury bonds (benefiting from interest rate hikes and appreciation of the US dollar).

However, it is worth noting that this US dollar cycle still faces different situations, which may cause different consequences. Unlike the US dollar rise cycle in the 1980s and early 21st century, the US is currently under heavy debt.

See the figure below. In 2021, the ratio of US government debt to GDP may reach 137.20%. In comparison, this ratio in the 1980s was less than 40%, and in 2002 it was about 60%.

According to the latest data, the ratio of federal debt to GDP is 125.52%, which is also far higher than the level in 1980 and 2000, see the figure below.

This brings a problem: the current US economic growth is strong, the labor and employment situation is very active, and the unemployment rate has hit a record low, but interest rate hikes (especially such a large rate hike) will suppress consumer demand and may lead to slowing economic growth. In order to avoid an economic recession, the country will have to significantly increase fiscal spending to withstand the economy.

The current federal deficit in the United States has reached US$1.09 trillion. If additional expenditures are to be added, it is naturally necessary to issue new bonds to raise funds and extend old bonds.

So the question is, in addition to raising interest rates, the Federal Reserve is also continuing to reduce the scale of bond buying to narrow its balance sheet. Who will pay for the bonds issued? The consequence of the bonds issued by

lacking buyers will be that government departments raise interest rates to sell bonds. In other words, government departments that are already struggling will have to face higher interest expenses, which will further expand the fiscal deficit, thereby continuously issuing additional bonds to raise funds and squeeze out private sector investments. This is what economics calls " crowding-out effect ".

Private capital has turned to government bonds and government bonds with lower credit risks, and avoided high-risk premiums (such as junk bonds) bonds - the latter is the most vulnerable and most needed financing in the time of economic turmoil. These projects cannot be supplemented by funds, and there will be great problems with their expiration date.

Finally, those industries that urgently need funds to maintain are eliminated first because they cannot obtain life-saving funds, and the domino effect affects all industries, which will have serious consequences for the overall economy. The economy is downward and the unemployment rate will weaken the overall consumption power, and consumption demand will decline, and the economy will further decline and enter a vicious cycle.

The overall economy slowed down, so listed companies were naturally unable to escape. The performance of companies declined, and their stock prices also declined, and the stock market performance was naturally under pressure.

However, due to the financial cycle, it usually takes some time for listed companies to be reflected in their performance. Therefore, the capital market can only rely on "guess" to expect potential downward space. This is why the company's previous performance is acceptable, but its stock price continues to be under pressure.

holds coins or holds shares?

If that's the case, what's the best thing to do now?

Obviously, the process of the Federal Reserve's tightening of monetary policy is still in progress, and the impact on companies has not yet been reflected in the stock prices of listed companies, and the adjustment of US stocks has not yet been implemented.

However, from the example mentioned above in the 2002 US dollar index peaked, it can be seen that the increased vitality of emerging market economies will also attract capital toward other exchange rate stable currencies with more opportunities and greater development potential.

From the previous article, the three major stock markets in Europe, America and Hong Kong can be seen from the decline since the Federal Reserve raised interest rates. The adjustment range of the Hong Kong stock market is the largest among the three regions. More importantly, although the Hong Kong dollar is pegged to the US dollar and is affected by the US dollar cycle, listed companies in the Hong Kong stock market mainly operate their businesses in Greater China, and their revenue mainly comes from Greater China.

Positive policies and potential opportunities will promote the economic development of Greater China, especially when most of the unfavorable news has been digested (as can be seen from the performance of Hong Kong stocks in the past year compared with other markets), the downside risk of the Hong Kong stock market may be lower than that of the US stock market.

From this point of view, holding coins (such as USD with better interest rate hike prospects) and holding shares (Hong Kong stocks with low valuations and excellent fundamentals) can be favorable choices, depending on your own risk willingness and risk tolerance.

This article is derived from Hong Kong stock decoding