To The Moon

Since 2023, the stock market has maintained a strong performance. 

Does this mean that the risk of economic recession is reduced? 

Or is it because the Federal Reserve continues to maintain its austerity policy (interest rate hike), even if inflation is slowing down? Now the interest rate level of banks has not reduced the economy to a point where it is enough to turn to neutral (or loose) policies, while the economic news in the United States is still stable, and the FED must continue to maintain high interest rates to force credit crunch to the limit. The dilemma faced by the directors is: when the inflation rate will return to 2-3%, and the proportion of interest expenditure in the fiscal deficit in total expenditure is increasing (with chart).

In my opinion, the FED needs to carefully balance economic growth and inflationary demand, and adjust policies appropriately to avoid the adverse impact of excessive austerity or looseness on the economy.

Personally, I think that the current loan interest rate can be said to be too high or too low, depending on your perspective. Since long-term interest rates cannot be higher than the inflation rate or the growth rate of economic GDP, otherwise it will affect the solvency of the U.S. government, high interest rates have always been questioned. However, if interest rates are too low, I don't know when the inflation rate will return to 2%. The current statement that "the interest rate increase cycle is over" has not yet become a definite fact. In this "dilemma", there is no reason for the Federal Reserve to cut interest rates.

Don't forget: the interest rate hike cycle is not completely over. This cycle may end in:

First of all, let's consider the impact of U.S. deficit spending on the economy. Even though the United States has been in a fiscal deficit for nearly 20 years, the possibility of bankruptcy is still very small. Therefore, I personally think the sharp drop in the US dollar and the reversal of confidence in deficit spending are the most unlikely situations to happen.

Second, the credit crisis with deteriorating creditworthiness is worrying. The problems caused by the rapid rise in interest rates in 2022 emerged in 2023, causing banks to refuse to lend. Although the high-growth stocks ARKK, cryptocurrency, SPAC and meme stocks have collapsed last year, they have not yet evolved into a widespread credit crisis, but there is still a need to be vigilant in 2023. Therefore, this crisis is still moderately possible.

Third, the company's earnings per share gradually emerged in the process of recession, leading to the further collapse of the stock market, which are the three most likely things to happen.

I think the Federal Reserve needs a stronger reason to cut interest rates than inflation slowing down. The simplest reason is that the stock market keeps falling. In fact, the Federal Reserve, like investors in the market, hopes to cut interest rates as soon as possible, because this can reduce the interest expenditure on treasury bonds and maintain the solvency of the Treasury Department.

Even if stocks have risen in the market in recent years, I still don't plan to invest a large amount of new funds in the stock market today, because as long as the Federal Reserve does not cut interest rates, the stock market will not see meaningful growth. However, if the stock market does not fall, the Federal Reserve will not cut interest rates! This cycle continues to plague us investors.

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