Recently, the inflation problem in the United States is quite serious, which is theirs.Principal contradiction:

As a result, the Federal Reserve has launched a series of tightening operations, and one of the direct consequences isThe dollar index continues to strengthen。

At the same time, some concomitant phenomena have taken place in the financial markets:

The long-term debt of the United States has plummeted.

2. The US stock market plummeted

3. Major commodities plummeted

For this kind ofResonance phenomenonThere is an empirical explanation:The strengthening of the dollar index has led to the fall of all kinds of capital markets.。

For this explanation, there will be a follow-up question: when will the dollar index peak? Some people will say, look at the monetary policy of the Federal Reserve; others will say that look at inflation.

As a result, the problem falls into a kind ofInfinite recursionInevitably got caught up inLandslide fallacy. The plan of this article is to look at the dollar index systematically and seek a different interpretation mechanism. Here we go.

The working principle of liquidity preference

If we divide assets into two categories:Price scalable assets and price non-scalable assetsThen the market value of a price scalable asset can be broken down into two factors:

(1) liquidity preference; (2) the number of non-scalable assets.

For any kind of price scalable asset, if the holder intends to hold a higher proportion of such assets, then the price of the asset will rise; on the contrary, the price will fall.

Therefore, the main target of curbing inflation isLiquidity preference-- increase liquidity preference, increase willingness to hold money, and prevent residents from chasing daily necessities with money.

However, the most important factor in operational liquidity preferenceToolsIs the monetary policy of the central bank.

As shown in the chart above, the monetary policy of the central bank can be divided into two categories: one is price policy, the most important is raising interest rates, which only affects liquidity preference; the other is quantitative policy, mainly shrinking tables, which affects both liquidity preference and the number of non-scalable assets. It is not hard to find that the austerity forces of the latter are stronger. Because the austerity mechanism and intensity of the two are different. In order to avoid the systemic financial risk caused by too fast tightening.The monetary authorities should control the path of changes in liquidity preferences.。As the picture above shows, the monetary authorities need to manipulate all kinds of tools.Using nodes and matching rhythms。
First of all, the monetary authorities need to use the expectation of raising interest ratesSlowlyBoost liquidity preference
Second, when interest rates are raised, liquidity preferences rise further.
Thirdly, introduce the expectation of shrinking table and superimpose the function of raising interest rate.Liquidity preference will rise quickly.This stage is the most dangerous time for the financial system
Last,Liquidity preference passivationThe shrinking table plays a dominant role, so finish it with this tool. Therefore, the Fed is not adding nonsense, nor is it looking at the economy or employment.The real tracking point is liquidity preference.。
Actually,The dollar index is a good tool for observing changes in liquidity preferences.Recently, the dollar index has pulled wildly. It is easy for us to know where we have progressed.Expected superposition of interest rate hikes and shrinking tablesHas pushed us into an area of rapidly rising liquidity preferences.

Seeing that the dollar index touched 105, many people panicked, so they began toLinear extrapolationI think the dollar index will soar all the time.

In fact, there is no need to worry.There is an upper limit of liquidity preferenceWhen you get to a certain area, it will be passivated. This mechanism is also very simple, no matter how much you prefer currency, it is impossible to realize all the assets in your family and hold the stock base.
If you know the story of liquidity preference, it's not hard to understand why Fed officials scare people with 75bp every day. Because they wantPassivate liquidity preference before shrinking the tableOtherwise, the financial system could be in big trouble.

Linkage Mechanism of liquidity preference

In fact, anyAssets denominated in dollarsWill be hit by the rapid rise in liquidity preference for the dollar. The most typical are national currencies.

In addition to national currencies, the US long-term bond market, US equity market and dollar-denominated block markets have all been affected by the surge in liquidity preference for the US dollar.

Generally speaking,The foreign exchange market is most closely related to the money market.Was the first force to report the increase in liquidity preference for the US dollar and spread it to other markets through the money market.

Take the yen as an example, when the yen starts to depreciate, a large number of investors will sell the yen, buy dollars, and thenInjected into the US money market.。

These dollars were originally scattered in various market segments, and the power of arbitrage was like a泵A steady stream of dollars are being drawn into the money market. Then, other markets are also short of dollars, new pumps are added, and so on.

In fact, the dollar stock of the whole market has not changed, what has really changed isLiquidity preference of each market segmentWell, everyone wants to hold more dollars.
The figure above is a simplified diagram showing the contagion process of liquidity preference: liquidity preference a muri-liquidity preference b muri-liquidity preference c muri-liquidity preference d

In the end, the liquidity preference of each market resonates.The liquidity preference of the dollar has systematically increased.。

As long as we understand this clearly, it is not difficult to understand the ten-year index of US bonds, US stocks and bulk markets against the US dollar.RelevanceThey are all part of a large chain of liquidity preferences.

Where is the process of liquidity preference?

So, is liquidity preference peaking right now? The conclusion of theoretical derivation is thatClose to the topIn the process of。

Why would you say that? We can look at each market segment.

The first is foreign exchange.The yen is the weakest developed country currency, depreciating fastest and most sharply, and oddly enough, it rose by 1% against the soaring dollar index on May 12th.

There is only one explanation:The currency with the nearest butt to the ground landed first.。

The second is American long-term debt.. Recently, the long debt of the United StatesDeleveragingThe phenomenon is so serious that ten-year US debt touched 3.2% at one time, but the process ended on May 9, and the ten-year Treasury yield fell sharply, falling below 2.9% at one point.

Finally, there are US stocks.

Different markets have different levels of leverage and fragility, and the rise of liquidity preference will lead to different deleveraging processes.。

Us stocks are the most vulnerable, with the Nasdaq down 30 per cent at one point, but the index rallied 3.82 per cent on Friday night, suggesting the end of deleveraging.

To be honest, if we only look at NASDAQ itself, we dare not come to the conclusion that NASDAQ bottomed out in a short period of time. However, after understanding the logic of liquidity preference, refer to the yen, the dollar index, and US long-term bonds.There will be a different interpretation.。

The study of this question once again reminds me of-Francois.-Jacob.A passage from:

For the same empirical facts, different theories will come to different conclusions.Phenomena do not speak, but theories that are used to process and describe phenomena.

The Firewall function of Exchange rate

At this time, there was a voice of opposition in the back row-- I have a counterexample: why did the long-term debt of the United States collapse like this and China's ten-year national debt remained low?

This is actually becauseExchange rate firewallThe role of.

Recently, the RMB exchange rate has depreciated sharply, effectively absorbing external shocks.

For the same subjectDifferent ways of pricing currencyDifferent risk calculation methods are implied. The yield of Chinese treasury bonds in ten years is 2.81%, butTen-year Chinese dollar bonds rated A + are valued at 3.92%. (ps: Moody's Corporation has a sovereign rating of A1 on China, and the interest rate on China's US dollar sovereign debt should be between 3.14 and 3.92)

In other words, the RMB exchange rate has stripped a large part of the risk premium.

Is the valuation of Hong Kong stocks really that cheap? We discussed a similar logic. The reason why the valuation of Hong Kong stocks is cheaper than that of A shares is becauseHong Kong stocks are denominated in US dollars.(ps: the Hong Kong dollar is almost equivalent to the US dollar because Hong Kong is a currency board system.)

As shown in the chart above, one thing takes on two risks-sovereign credit risk is passively embedded in the valuation of Hong Kong stocks, unlike a-shares, which can absorb some of the sovereign credit risk through RMB.

In this sense, the depreciation of RMB effectively absorbs the impact of the increase in liquidity preference of the US dollar. It is precisely because of this wall that a-shares and Chinese long-term bonds have been so stable in the last half a month.

Symmetrically, we can imagine another scenario:If the exchange rate is to be kept stable at 6.3, the central bank will have to raise the interbank interest rate, which will spread to the stock and bond markets.。

Concluding remarks

To sum up, the most dangerous phase of the appreciation cycle of the US dollar isThe stage of a rapid rise in liquidity preferenceGlobal asset prices will fluctuate sharply.

But,Liquidity preference will not rise indefinitelyWhich will be found in all market segmentsHit the top in turnUntil it reaches its peak systematically.

Therefore, in order to observe changes in liquidity preferences, we had better keep an eye on the foreign exchange market, the US bond market, the US stock market and the commodity market.

If all goes well.The dollar index will peak before the June contraction.. This is the prediction given by this framework.

So there is no need for us to be too nervous about the upward cycle of the dollar.

In addition, the reason why the country is calmBecause the exchange rate firewall works.Absorbed the shock. Therefore, there is no need for us to frighten ourselves with the devaluation of the RMB exchange rate and not to reverse the causal relationship.

With regard to the devaluation of the RMB, the most important point to pay attention to isImported inflationThe central bank must have some plans for this problem.

Finally, let's talk about the situation of international capital flows. There are three financial conditions for going northward to fetch the bottom of a shares on a large scale.
1. The deleveraging process of a-shares has ended and has been reached.2. The risk of RMB depreciation has been released and has been reached.3. The local deleveraging process tends to be stable and has been achieved.

At present, the three conditions implied by the theory have been met, and it is time for us to verify the theory.

Ps: data from wind, pictures from the network