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The Federal Reserve drives up inflation
For years, central banks around the world have been emphasizing their commitment to achieving their inflation targets, and for years they have been failing. In the past 10 years, the monetary policy has not had a substantial impact on the real inflation rate, and the inflation expectation is always lower than the target.
Recently, there have been more and more commitments on "balanced" inflation targets, which means that during the period of economic expansion, there have been some phenomena of excessive inflation to make up the expected gap during the period of economic recession or economic growth depression. However, since the central bank failed to raise the inflation rate to 2.0%, why do investors have more confidence in pushing the inflation rate above that level?
We can imagine a situation where inflation in the United States is well above target, and not only has the Fed allowed this to happen, but its tolerance for excessive inflation will surprise investors.
Inflation has been strong, while the broad consumer price index (CPI) is more than 2.0%, and core personal consumption expenditure (PCE, the Fed's preferred measure) continues to rise. It can be seen that there are many reasons for the rise of inflation in the United States this year, among which the most important factors include the contraction of the labor market, technical factors, the rise of oil prices and the depreciation of the dollar. The San Francisco Fed's wage rigidity index reflects wage growth across the broader U.S. population. As shown in the figure below, since the beginning of 2018, the proportion of U.S. workers who have achieved steady wage growth has declined sharply, and reached the peak in 2005 for the first time during this growth period.
In our view, the Fed's response is quite different from that of 2017-2018, when the labor market contraction led to excessive concern and interest rates continued to rise. Here, the Fed's commitment to achieving its 2% inflation target was rekindled, and the Fed cut interest rates again to improve its credibility. When there is "easing bias", the core PCE price index may reach 2.5% by the election time, and the generalized CPI index may reach 4% year-on-year. As a result, investors will eventually notice the central bank's determination to reinvigorate inflation.
Impact on investment
The investment impact caused by the grey Swan incident depends in part on the economic background. If the economic growth remains strong and the enterprise obtains certain pricing flexibility, the stock can maintain its value. On the contrary, if the inflation rate rebounds against the background of slow economic growth, the concern about the recurrence of stagflation in the 1970s will put heavy pressure on the stock market.
In addition, in our view, inflation protected bonds (TIPS) and the energy and metals / mining industry may be more effective hedging tools than long-term bonds.
"Faang", the leader of science and technology, is facing challenges
Large technology companies, including Facebook, apple, Amazon, NFlx and Google, are experiencing an unprecedented market competition. As they continue to expand their markets, we believe that the possibility of significant regulatory action in the US will increase, even if not in 2020, in the near future.
There are three main problems that make technology companies fall into regulatory dilemma. Obviously, antitrust is the first, such as the European regulatory action against Google and the resulting huge fines. The second is tax. The State adopts new tax for technology giants because they play an important role in consumer life, which is different from the lowest local tax obligations. The third is the ownership and privacy issues of digital assets, such as the Facebook leak, which has attracted the attention of regulators on obtaining, using and commercializing personal user data. Regulators' focus on these issues has significantly increased the number of times technology leaders have been called to Washington, D.C.
Impact on investment
We don't see the risk of market valuation taking into account the new regulatory environment today. Historically, once there are regulatory actions that may lead to the reduction of marginal profits or limited growth of enterprises, the valuation of enterprises will start to decline. In particular, considering that faang stocks alone account for more than a quarter of the S & P 500's Cumulative Return of 190% since 2012, many investors have reset their growth expectations for these stocks. The decline of technology stocks will have a negative impact on the whole stock market in the short term.
Investors are likely to reduce their exposure to fanang shares and change their expected returns on those shares. At the same time, in this case: turning to value stocks; looking for companies that improve productivity through technology; buying international stocks in developed markets (which are already relatively low valuations) may be useful strategies in our view.
Maturity of cryptocurrency
We are in a pioneering period in the history of finance. Some trends and changes in this period will have a profound impact on the whole financial industry. For example, a state supported digital currency will appear. Digital currencies, such as bitcoin, whose value fluctuates sharply, have contributed to the emergence of the prototype of private sector stable currencies, where value is linked to sovereign currencies. Stable currency will use blockchain technology to pay seamlessly and safely. The private entity will convert the stable currency into the regular legal currency at a fixed exchange rate.
Logically speaking, stable currency will become the digital currency of the central bank. In fact, according to the bank for International Settlements, many central banks around the world are studying digital currencies. For example, the people's Bank of China has indicated that it plans to launch
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