Fed will beat inflation with recession, housing market will be sacrificed

 The effects of monetary tightening by global central banks to curb inflation are starting to show, with the M2 money supply in the U.S. decreasing by 1.4% annually in December 2022, the first time since records began in 1960. But today we still have negative interest rates and the Fed will not stop raising rates until Powell creates a recession and the unemployment rate starts to rise.

The real interest rate is the interest rate that investors, depositors or lenders receive (or expect to receive) after taking inflation into account. Referring to the Fraser equation, the real interest rate is roughly the difference between the nominal interest rate and the inflation rate. If investors are able to lock in an interest rate of 5% for the coming year, and banks expect inflation in the U.S. to be 2%, they will receive a real interest rate of 3%. If the economy is at risk of recession, or if a crisis hits, the central bank often cuts interest rates in response; when the economy resumes growth, if it expands too quickly, causing a sudden surge in prices, the real interest rate will have a negative value.

In the 1970s, there were two negative interest rates in the United States, with real interest rates dipping to negative 5%. This means that when inflation was surging, the benchmark interest rate was lagging behind and had not yet caught up. This is because the Federal Reserve suspended raising or lowering interest rates too early, and as a result, inflation had the recoil and continued to surge upward. Then the Federal Reserve had to accelerate the interest rate increase so that the real interest rate not only became positive.

If the reader understands, then imagine that in early 2022, when U.S. inflation was at 6%, the real interest rate was negative 5-7%. And the current federal funds rate (Federal funds rate) 4.75%, while inflation is still more than 6%, the real interest rate is still negative, so why will cut interest rates? In Tuesday's congressional hearing, Powell pointed out that the recent economic data is stronger than expected.

It mentioned that inflation has been slowing in recent months, but that there is still a long way to go before inflation falls back to 2 percent, and that the road could be bumpy. As I mentioned, the recent stronger-than-expected economic data suggests that the final level of interest rates may be higher than previously expected," he said. We would be prepared to accelerate the pace of rate hikes if the overall data suggest a need to accelerate monetary tightening, and restoring price stability may require us to maintain a restrictive monetary policy stance for some time," he said. Immediately following the quote above, Powell said he would even use tools to get inflation back to the Fed's target of 2 percent and keep long-term inflation expectations well anchored at all times. The historical record is a serious warning against premature easing," he said. We'll stay the course until we're done," he said.

This suggests that the final level of interest rates may be higher than previously expected. The bond market doubled down on the U.S. recession, and the inversion between 2-year and 10-year U.S. bond yields exceeded 100 basis points for the first time since 1981. The probability of a 50 basis point rate hike in March has reached 70%, and a 50 basis point rate hike in May is 50%.

Last year, the Federal Reserve started to shrink its balance sheet in June, and from September, it will be capped at $95 billion per month. Since September 15, it has shrunk by $88.761 billion in five weeks until October 19, and has shrunk by $51.058 billion so far in October alone. The Fed's balance sheet has fallen since it hit a high of $9.015 trillion in mid-April, so let me ask another question. Then where is the money that was recovered from the shrinkage?

When the money is less, the time is still negative interest rates, then why will reduce interest rates? Why will it be the time to increase leverage? At the same time, if you use the 18-year Hong Kong property market cycle, you can analyze the changes in the property market, found that the property market cycle began in 1985, following the 18-year property market cycle changes.

Hong Kong property market is undoubtedly the bottom of the rise in 2003, that 2021 is likely to be the completion of this property market 18-year cycle. If we calculate further forward, and 2003 while using the 6-year cycle mentioned earlier, that is, just after the signing of the Sino-British Joint Declaration in 1985, the property market rose.

The 1967 riots caused the property market to fall, and a large number of Hong Kong people emigrated, and after it subsided, property prices began to rise, and repeatedly until 1981.

-After 1984, when the British and Chinese governments signed the Joint Declaration, Hong Kong's prospects became clear and foreign investment was attracted to Hong Kong. In addition, it was during the interest rate reduction cycle, when the prime rate dropped from 17% in mid-1984 to 5% in 1987, and the Hong Kong government limited the supply of land to a maximum of 50 hectares per year, which stimulated the property market.

-The year 2003 was the fatal blow that brought the Hong Kong property market to the bottom. SARS hit the Hong Kong economy hard, the property market is not immune, from the fourth quarter of '97 to the second quarter of '03, property prices plummeted 66%, and then the introduction of the Individual Visit Scheme and the quantitative easing in 2008, the property market has been rising.

If you read this column, we all know that 2021 is the end of the 18-year cycle of the property market, and 23 to 25 years will be a very critical time. So today many people are still using yesterday and today to analyze tomorrow; while Xiao Long is using tomorrow and the future to analyze the future.