Chapter 184: Bear Market on the Surface, Bull Market Under the Surface
"You haven't told me yet why you are still building positions in strong cyclical stocks..." Zhao Xinyue came back to her senses and reminded.
Hearing this, Li Feng drank a cup of tea, flipped through a stack of documents, and analyzed:
"In recent years, the stock market has been very strange and complex, leaving many people confused. First, there was the general rise in 2020, and the sharp rise in consumer stocks and track stocks. Then came the killing of blue-chip stocks in 2021, which directly killed insurance stocks, education and training stocks, Internet stocks, and real estate stocks... In 2022, the killing of bank stocks and real estate stocks began again..."
“This de facto bear market is actually a bull market underneath…”
"Looking back now, over the past three years, the only sectors that have truly achieved positive returns and made a lot of money are strong cyclical stocks during the inflation cycle... The most outstanding sector is the coal sector!"
"This hyperinflation cycle is very different from the hyperinflation cycle of 2001-2007. The last hyperinflation cycle was a very standard domestic and international fiscal and monetary easing, coupled with the resonance of the real estate cycle, which led to a super bull market. It is a very standard bull market that is most worthy of repeated study."
"During this period of hyperinflation, there has actually been a divergence of varying degrees both domestically and internationally. Fundamentally, this hyperinflation cycle was triggered by three main factors."
"First, the Federal Reserve's monetary easing and spending... We've talked about this repeatedly before... In 2020, the Federal Reserve not only lowered interest rates to zero, but also directly distributed trillions of dollars to the public... This directly triggered hyperinflation..."
"Second, the global deglobalization is unfolding. Since China joined the World Trade Organization in 2001, the globalization of the world economy has further expanded, and the division of labor has become more refined, which has greatly reduced the manufacturing level of various commodities. However, this situation has deteriorated greatly after the 2008 trade war, and collapsed precipitously after the 2020 COVID-19 pandemic...
"Today's economic globalization has become as thin as paper. It's been replaced by trade wars, chip wars, and various overt and covert trade barriers... This has invisibly increased the manufacturing level of various goods, directly driving up inflation..."
"Third (harmonized), oil is the lifeblood of industry and the source of inflation. During the 1970-1980 oil crisis, the Middle East oil embargo triggered more than two decades of stagflation in the Western world. Moreover, due to the US's defeat in Afghanistan, it has effectively lost control of the Middle East..."
"When we monitor inflation, we need to keep one eye on the Federal Reserve's fiscal and monetary policies, and the other on crude oil prices. At the same time, we also need to keep a close eye on domestic fiscal and monetary policies. This is a large ecosystem that complements and influences each other..."
After a pause, Li Feng continued, "Inflation is not only a monetary phenomenon, but also a supply and demand phenomenon... This is very obvious in commodity prices..."
"Typical examples include copper mines. From exploration to mining, and then to the production of finished products, it takes at least six or seven years, or even more than ten years. This is why major inflation cycles often last for several years, or even 10 to 20 years..."
"The last major inflation cycle, from 2001 to 2007, lasted six years, and going back to 1970-1980, it lasted at least ten years... This is due to the commodity production cycle..."
"This major inflation cycle, fueled by the Federal Reserve's unprecedented monetary easing, arrived suddenly. Given the reality of a supply-demand mismatch, simply raising interest rates won't curb inflation, as they won't boost commodity prices... The only option is to temporarily suppress consumption, curb demand, and control commodity prices... But this will directly lead to an economic downturn... And with an economic downturn, we have to release more money to stimulate the economy... It's a vicious cycle..."
"Not to mention the current constraints of carbon neutrality... World energy prices are rising... further increasing the cost of living..."
Li Feng said a lot.
Lin Menghan and Zhao Xinyue seemed to understand what he said.
Finally, Lin Menghan concluded: "In other words, the great inflation cycle is not over yet?"
"No!" Li Feng affirmed, "This short-term interest rate hike is just a temporary respite. Future interest rate cuts will further stimulate the rise in commodity prices..."
"To truly smooth out this period of hyperinflation, on the one hand, inflation must continue for a period of time to stimulate commodity production and allow the economy to adapt to a post-inflationary economic state. On the other hand, either economic globalization must be re-established or the global economy must adapt to a state of deglobalization..."
"It's clear that just one year won't stimulate commodity production. Even if it does, it won't produce enough goods in a short period of time. Furthermore, economic re-globalization is no longer realistic, while anti-globalization is intensifying... and there's no sign of stopping..."
“So the great inflation cycle is not over, it’s just taking a break.”
Li Feng made a summary.
Lin Menghan seemed to be lost in thought.
Zhao Xinyue thought about it and disagreed. "You keep talking about a period of hyperinflation, but we in Guojia don't have hyperinflation. Housing prices keep falling, and no one dares to buy a house anymore. Many companies are laying off employees. The egg-filled pancakes on the street have been selling for six yuan each for four or five years now. There's no hyperinflation, is there?"
"This is exactly the strange thing about this economic cycle," Li Feng continued his analysis. "The world economy is in a period of hyperinflation, but our Guojia proactively suppressed the three major bubbles in education and training, real estate, and online finance in 2021... At the same time, there was also the interference of the epidemic... This has led to very low inflation in our Guojia... It can be said that this is the brilliance of the policy. Without raising interest rates, using only some administrative measures, the purpose of raising interest rates has been achieved..."
"Then you should analyze the economic situation in 2023 and how to allocate positions." Lin Menghan continued.
Li Feng calmed down and said carefully:
"From a macro perspective, by 2023, the Federal Reserve will still be raising interest rates, but the rate of increase is expected to be lower, which will ease the pressure on commodity prices. Over the past year, commodity prices have not fallen much, especially copper prices, which have fluctuated around 70,000... Once the Fed stops raising rates, there is a high probability of a rebound, or even a reversal."
"Domestically, the epidemic has been resolved...price transmission has become relatively smooth...but the real estate problem remains unresolved. The latest Central Economic Work Conference once again emphasized the importance of housing for living, not for speculation, placing a high priority on securing housing, and emphasizing the need to prevent and resolve major economic and financial risks..."
"Real estate is the mother of the economy and a monetary amplifier. Although corporate financing costs have been reduced and bank loan interest rates have been falling, due to the existence of the real estate black hole...price transmission is not effective...The economic outlook for next year is cautiously optimistic..."
"In summary, both international and domestic fiscal and monetary policies will remain tight in 2023, but this situation has eased somewhat. As for the stock market, it has a peak and a bottom, and is fluctuating..."
"So, we will build 50% of the warehouse, and the target is still non-ferrous shipping companies. Zijin, Chinalco, Tin Industry, and China Shipbuilding will each buy one million yuan."
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