Caixin Network News on November 4th (Editor Huang Junzhi) Founder of Wind Shift Capital and senior financial strategist Bill Blain stated that with the decrease in borrowing costs, households and businesses may breathe a sigh of relief, but they should not be completely at ease because interest rates and inflation will remain high, and this reality may trigger a significant drop in the stock market next year.

He predicts that global stock markets will experience turbulence in the next 12 months. Blain said that the Federal Reserve is unlikely to lower interest rates to very low levels as the market believes, and borrowing costs may indeed start to rise from now on. This could deter lending, slow down trading, and cause the US and global stock markets to fall by 7% to 12%.

"I believe the crisis we face is that when interest rates start to rise, governments cannot continue to boost the economy in a rising rate environment because they have lost the market's support," he added.

In a situation of credit tightening, he doubts whether the US can introduce stimulus measures like during the pandemic, as people are concerned about the overall debt levels and the impact of inflation on the economy.

"The reality is that inflation will quietly return to the global economy. Rates will have to rise," he said.

Interest rates will remain high

For investors, Blain's forecasts may sound counterintuitive, as they have already absorbed the central bank's significant interest rate cuts. But Blain emphasized that the US economy faces too much inflation pressure in the medium term to guarantee aggressive loose policies.

First of all, the federal debt has ballooned to a record $35 trillion. Economists point out that government's rapid borrowing is a factor that could exacerbate inflation. Meanwhile, supply chain issues persist, and with escalating geopolitical tensions, global trade seems to be more diversified, which could also drive up inflation.

Lastly, the high tariff threats by former U.S. President Donald Trump could result in tariffs on nearly all goods imported into the USA, economists say, ultimately passing on the costs to consumers.

"I think inflation will become more entrenched, just like in the 1970s and early 1980s," Brian said. "This will be a very, very different economy, and we just need to get used to it."

Other forecasters also warned that the stickiness of inflation may be significantly larger than what the market expects. Blackrock strategists said in a recent report that core inflation rates are unlikely to fall back to the Fed's 2% target, noting that the huge U.S. budget deficit and other "major forces" will push prices higher.

This means that investors waiting for borrowing costs to return to near-zero levels will be jolted awake. Brian believes that in the "new normal," interest rates will hover between 4.5% and 6%, resulting in "soaring" interest payments compared to the levels before the COVID-19 pandemic.

Additionally, Brian mentioned that businesses may also take a hit. He stated that this does not necessarily mean the market will crash or a wave of "zombie companies" will collapse, but transactions in the private equity sector may slow down, and some of the worst-off companies financially may go bankrupt.

Finally, as the speculative bubbles in asset prices burst, stock prices will return to a much more reasonable level.

"I believe the super-low interest rates and loose policies from 2010 to 2022 still have significant consequences, and I think stock prices overall still reflect speculation and low rates," he added, "I see no real reason to expect significant rate cuts."

Editor/ping