Fed's Dilemma: Combat Inflation or Recession

2024-07-11 152 Comments

Hello friends, today is October 7th, and tomorrow the A-share market will open. First of all, I wish everyone's accounts will be in the black and congratulations on making a fortune.

Today's program will continue with the topic of the United States' non-farm data fraud. Two days ago, the U.S. non-farm data exceeded expectations, and I directly stated in the program that the U.S. data was fabricated. The purpose of the fraud is also quite clear, they can't stand the excellent performance of the Chinese stock market.

However, due to time constraints, the analysis was not thorough enough. Today, we will continue the discussion and include some other related factors for analysis. We will find that the situation is becoming more and more lively. The financial war has not only not ended but seems to have entered a climax.

Before the National Day holiday, our attention was attracted by the stock market. In fact, it's not only the Chinese stock market that is soaring, but also the prices of commodity goods are rising sharply.

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The A-share market started to rise on September 24th. Coincidentally, global commodity prices also began to rise across the board from September 24th. The price increase of domestic coal and steel is also rare in recent years. For example, rebar steel directly jumped from 3,000 points to above 3,500 points.

It's not only the commodity prices that are rising, but also the shipping index is rising. The Baltic Dry Index rose by 5% in a week, including crude oil. The downward trend has also stopped and began to rebound.

What do these data indicate? They indicate that there will be a stimulating effect on inflation, and this stimulating effect is aimed at Western economies such as the United States, Europe, Japan, and South Korea. For the United States, it is bad news. However, for China, it is not only not a bad thing but a good thing.

Then let's look back at the current embarrassing situation of the United States. In September, the United States just cut interest rates by 50 basis points. In order to create an atmosphere for the rate cut, the United States just revised the employment data in August, reducing the data for 2023 by 810,000 people.

What does this mean? It means that in 2023, the United States actually does not have such a high employment rate, and the average monthly increase in the number of employed people should be reduced by 70,000.

Is this shameful? The average monthly increase in the United States is only about 100,000 to 200,000 people. You suddenly reduce it by 70,000. Are the statisticians all graduated from fetal education?The intention behind the United States revising its data downwards is to indicate that poor employment represents a bleak economic outlook, hence the need for us to lower interest rates. Consequently, they have significantly cut rates by 50 basis points, exceeding expectations.

In reality, it is common knowledge worldwide that the U.S. cannot sustain high interest rates above 5 percent. After more than two years of rate hikes, they have absorbed a substantial amount of global dollars flowing back into the U.S., yet they have failed to trigger a significant economic collapse in any noteworthy economy.

At its peak, the Federal Reserve's reverse repurchase agreement accounts were consistently holding over two trillion dollars, simply earning interest, which has left the Fed at a loss of more than 20 billion. The annual interest expenditure has reached a trillion dollars. It is clear that this situation is unsustainable.

Why is this the case? The U.S. is well aware of the reason: it is all thanks to China.

The U.S. thinks to itself: Thank you, China, your currency swaps are too powerful. Those countries that were short on cash were about to sell off their assets to me at a low price, but you've used dollars to pay off their debts for them. I admit defeat in this round, and I will lower interest rates.

We had thought that this would mark the end of the financial war, but we were too naive. The financial war is far from over; it has just begun to reach its climax. The roles have reversed. In the past two years, it was the U.S. on the offensive and China on the defensive. Now, it is China on the offensive, and the U.S. has started to play defense.

During our National Day holiday, the stock market was a hot topic. The Chinese stock market soared, with results that were surprisingly good. Not to mention the boost to domestic morale, the impact on overseas assets has also been immense.

Overseas investment gurus unabashedly declare: Buy all Chinese assets. This attitude is extremely lethal for the U.S.

The U.S. raised interest rates to draw funds from around the world, including from China. We have all personally experienced this in the past two years, and it was not pleasant. Real estate companies essentially all collapsed, and the domestic economy suffered greatly as a result.

Now the situation has reversed. The rise in the Chinese stock market is also drawing funds from overseas, including from the U.S. Is the U.S. comfortable with this? Impossible. It is not just physically uncomfortable but also a loss of face.The US dollar and the Chinese yuan were never on the same level to begin with. The lofty US dollar and the non-freely convertible Chinese yuan have been in a seesaw battle, and even if there are wins and losses on both sides, it is still a loss for the Americans. Just like on the Korean battlefield, the Volunteer Army faced eighteen enemies and ended with a ceasefire. Can the US military dare to claim victory?

Now, the prices of bulk commodities and freight have also started to rise, with a momentum similar to that of the Chinese stock market, which is also very fierce, another sharp knife stabbing at the Americans.

The strike of US port workers has just ended, and the port not only promised to raise wages for the workers but was also forced to agree not to introduce automated processing equipment within ten years.

Of course, we should applaud the victory of the American working class. We would love it if the United States entered communism tomorrow. The United States is the beacon of communism for the whole world, where the interests of the working class are paramount. Isn't this the goal that China has been striving for? The result has been achieved by the United States, which is commendable!

However, as everyone on Earth knows, the victory of American workers will ultimately be paid for by all American consumers. Prices will rise, and due to the low efficiency of just one port, the prices in the United States will have to increase.

Now it's even better, with global bulk commodities also rising in price, and sea freight rates increasing, the United States is bound to face a significant possibility of rising inflation.

Thus, we have witnessed another farce, the release of the US non-farm data in September, which exceeded expectations, with data that was so bizarre that it was shameless. We discussed this in our previous episode, so we won't repeat it today.

However, I suggest that the previous episode and today's should be watched together. If you haven't seen the episode that came out on the 5th, I recommend going back to watch it. Both episodes are somewhat one-sided, but when connected, they provide a more comprehensive view.

This is the dilemma that the United States is currently facing: to prevent inflation or to prevent recession, which one do you want? Anyway, you can't have both because China won't allow it, you can only choose one.

Whether you are willing to admit it or not, the dilemma that the United States is facing now is caused by China.In the previous issue, we mentioned: If the Chinese stock market remains as stagnant as a dead dog at 2700 points, it wouldn't have attracted foreign capital to be so eager, and the United States wouldn't be so entangled.

Former Treasury Secretary Summers said that cutting interest rates by 50 basis points was a mistake. Why didn't you say that earlier? Isn't it because you saw the abnormal rise in the Chinese stock market, the rise in commodities, and the pressure on US inflation and capital outflows that you said it!

And who caused all these rapid changes? Isn't it China?

In addition to this, can you find a second reason? I believe no one can find it, the fact is that China did it on purpose.

Don't you want to cut interest rates? Of course, I welcome you to cut interest rates, but I don't want you to be so smooth! You want to add, you want to cut? Sir, the times have changed, you should also be uncomfortable.

I can't be sure that all this was planned in advance by China, that would be too divine! However, it is also impossible to deny that all this is a coincidence, that would be too coincidental. No matter how we assume, the fact is that it happened, we can believe that China's decision-making layer still has high people, China's level and ability to operate at a global height are higher than the United States.

From this perspective, the Dongfeng 31 missile's 12,000-kilometer sprint is of great significance. Since China has chosen to attack in the financial war, it must guard against the United States being desperate. Of course, the possibility of a direct hot war between China and the United States is not great, but it is also necessary to prepare in advance, and it is still good to take preventive measures in advance.

The truth is within the range of fire. Within a range of 12,000 kilometers, it is best for us to engage in cultural struggles rather than physical struggles.

We should not be too optimistic, because the current domestic situation has not fundamentally changed, and the profit rate of large-scale enterprises in August still decreased by 17%. However, after a comprehensive analysis, we will find that China's strategic advantages are still a bit stronger than those of the United States.

Firstly, the leverage ratio of the central government, that is, the proportion of national debt to GDP, among major countries, China is still the lowest. China is only 30%, while the United States is 160%.The pressing issue that China urgently needs to address is the drying up of liquidity; even with money in the market, it's not circulating. In the past, land and the indiscriminate spending by local governments could stimulate the flow of money, but now both of these avenues are in a bind. All that's needed is another means to get the funds moving.

It's likely that the higher-ups have been planning the stock market for a while, but they've been hesitant to act due to the U.S. interest rate hike cycle. Ironically, the U.S. unexpectedly cut interest rates, so there's no need to be polite anymore; let's go all out! Looking back now, this should be a very reasonable explanation.

At the same time, China has indirectly demonstrated another strength: although global commodities are priced in U.S. dollars, the real control lies in my hands. I can make them rise or fall as I wish.

Some may call me a braggart, but I invite you to look through past Western media reports. Whenever there's a report on a drop in commodity prices, more than 80% of the time, there's a line like this: "Due to the bleak economic outlook of China and emerging markets." Western media report this way; are they also bragging?

Some might ask: With the Fed's stance now becoming more hawkish, will the U.S. stop cutting interest rates, or even start raising them instead? Such thoughts are not necessary, but they are quite amusing and dramatic.

When the U.S. cut interest rates by 50 basis points, I did a show with a hilarious title: I said that U.S. interest rate cuts are like diarrhea; once it starts, it can't be stopped.

The current predicament of the U.S. is just that: it wants to have diarrhea, and it has already started a little bit. Now, suddenly, an external force is making it hold it back, not allowing it to continue. Can you imagine how uncomfortable that is?

Everyone has experienced diarrhea, and when you've just started and then have to forcefully hold it back, you can feel like dying. The Fed is in the same situation now, holding back until its face is red and its neck is thick, feeling like dying.

But in the end, it will still have to let it out. Don't worry that it can reverse and raise interest rates, unless it can sit back down on the diarrhea it has already expelled. Do you think that's possible?

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