To The Moon

Last night, U.S. stocks opened sharply lower. After all, it's time again for the details of the Fed minutes to be released. Traders have to prepare for risk control in advance.

Before the market, U.S. inflation continued to exceed expectations by a wide margin, hitting a 40-year high. Meanwhile, core inflation is rising at the same pace as headline inflation. This phenomenon tends to occur when all consumption items are generally rising. The last time something like this happened was during the stagflation period of the 1970s and 1980s.

However, although the minutes of the Fed's meeting mentioned the expectation of raising interest rates in March, it did not specify whether the rate of interest rate hikes would be 25 points or 50 points. At the same time, the minutes did not specify when the reduction of the table will begin. The market believes this shows the Fed's dovish stance and has no intention of accelerating tightening.

After the historic slump in 2020, the Fed's balance sheet hasn't stopped expanding -- except in July 2020. At that time, the magnitude of the one-day plunge in U.S. stocks was comparable to that of March 2020, and the one-day rise in market implied volatility was one of the highest in history. Since then, the Fed has never dared to surprise the market any more, and its balance sheet has expanded all the way, and it is now close to $9 trillion.

Is the Fed really afraid to alarm the market? The market seems to have forgotten:

- 2000: The Fed raises interest rates to 6.5%, bursting the dot-com bubble;

- 2008: The Fed raises interest rates to 5.5%, disrupting the housing market;

- 2018: The Fed raised rates to 2.75%, the stock market plummeted, and the repo market was stormy;

- 2022: The 10-year U.S. Treasury yield is only 2%, and when people talk about the Fed tightening more than expected, they say "no way."

During the stagflation period in the 1970s, in order to delay raising interest rates, the then chairman of the Federal Reserve, Arthur Burns, a legendary master of the economic cycle, a mentor who influenced Friedman to study economics and become an economist, founder of the NBER Bureau of Economic Research, A generation of masters who have defined America's economic booms and busts has argued that many of the factors that affect inflation are caused by exogenous individual factors that have nothing to do with the Fed's monetary policy. Accordingly, he created the concept of "core inflation".

So, at a time when the Yom Kippur War in 1973 caused oil prices to soar, Burns argued that the factor for this price increase was a one-off and should be stripped from the inflation calculation — which is 1/3 of the inflation calculation weight. Later, when El Niño weather in '72 caused food inflation to spike, he again argued that it was a one-off phenomenon and that food inflation should also be stripped out of the inflation calculation - which is 1/8 of the inflation calculation weight.

However, despite removing these "one-off" items, inflation still climbed out of control. At this point, Burns also got out of control, arguing that items such as used cars, jewelry, children's toys, household appliances, etc., were all one-offs and should also be stripped from the inflation calculation - which is 1/6 of the inflation calculation weight. In the end, after removing all one-off factors, core inflation weighs only 1/3 of the original headline inflation item. But inflation still couldn't stop and continued to soar.

The historic stagflation that followed was well understood by everyone. In the process of rising inflation in the past two years, the Federal Reserve and many economists have pointed out that factors such as used cars have caused inflation, and based on this, they believe that inflation is "temporary" and continue to delay tightening monetary policy. This scene seems familiar.

When Burns revised his inflation calculations in the early 1970s, U.S. inflation was about where it is now. Thanks to Burns's argument for soaring inflation, he was unable to make excuses and missed the best time to deal with the great inflation of the 1970s. Friedman's epoch-making "monetary economics" theory was later created, and it also created Volcker's exclusion of politics. Pressure subdued inflation and became the most respected Fed chairman.

Today, the benchmark price of oil in cloth has exceeded the $100 mark; the United Nations Food Programme’s food price index has hit a new high in more than a decade; many commodity warehouses have historically low inventories; coffee is so expensive that even Brazilians in coffee-producing countries can’t afford to drink it; more An international commodity futures price curve shows that the recent inventory shortage is the highest in history...

Will it be different this time?