$Tiger Brokers(TIGR)$ 2024 is a year of uncertainty. Sure, we might be ending 2023 with strong performances, and a strong indication of where inflation and interest rates is heading, but how will the market react to it?

Some basic economics to explore here, which i have broken down into parts for easy explanation later.

1. Interest rates are part of monetary policies aimed at influencing the amount of money flowing into the economy, so as to influence inflation rates.

2. It does this by increasing or decreasing the cost of borrowing/rewards for saving, thereby resulting in the borrowing price/savings reward going up or down.

3a. As interest rates go up,

3b. more people are incentivized to save as the rewards of saving is higher, while more people are also disincentivized from borrowing as the cost of borrowing increases.

4a. As borrowing decreases and savings increases, less money flows into the economy,

4b. resulting in a reduced demand/rate of increase in demand for goods and services, thereby reducing the inflation rate.

Why is this important?

It is important as we need to understand which stage we are at of this cycle in order to place a finger on where the rational economy might possibly go in 2024.

Stage 1: Late 2021/Early 2022. Feds realise that inflation rates are way too high (more of a supply issue than a demand issue, but that will be explored in another post) , and will likely continue going up should nothing be done.

Stage 2: Early 2022-Mid 2023. Interest rate climbs about 4-5%. Inflation remained sticky (as it usually does! Monetary policies have a time lag as markets must price in changes to interest rates (think: refinancing after lock-ins!)). Supply side issues continue to plague the world (Russio-Ukraine war on grain and oil), which monetary policies cannot fix.

Stage 3: interestingly, we don't see much of this happening in US. This is due to a low marginal propensity to save (MPS), which is influenced by a variety of factors including socio-economic and cultural ideas/beliefs about saving. Interest rates influence the MPS, but with a low initial MPS, the increase in MPS doesn't really do much to actual dollar saving.

Stage 4: late 2023-?2024. Here we see indicators of faltering demand and thus slowing inflation rates. Inflation has been falling, but core inflation remains sticky (again a possible factor due to supply side effects on interest rates). For this to happen, discretionary spending has to fall at a faster rate than core spending.

My view is that we are currently in stage 4 of this cycle. With falls in spending comes falls in GDP, and thus resulting in falls in growth. If interest rates continue to remain high, spending might continue to fall, resulting in a slowdown of the economy. And with this comes the guessing game of whether the Feds will cut interest rates, which has been a factor of what is driving the market upwards, when the economy might be heading for rough waters ahead.

As usual, dyodd, trade safe and a Happy New Year!

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