1.Residents' balance sheet: no damage, but benefit

The most different thing about the current US recession brought about by the COVID-19 epidemic is that the balance sheets of the US residential sector have not suffered any damage, but have benefited instead.

For example, although the US economy fell sharply last year, US house prices rose sharply. As of December, house prices in 20 large and medium-sized cities in the United States had risen by 10% year-on-year, compared with less than 3% before the epidemic, so despite the impact of the epidemic, the real estate assets of American residents have risen sharply.

This is also the most different from the 2007 subprime crisis, when U. S. real estate prices plummeted, household wealth shrank and bankruptcy default rates rose significantly. It was not until after 2012 that the US housing market returned to its growth track.

The financial assets of American residents also rose sharply last year.The 2007 subprime crisis triggered the financial crisis, and the US stock market plummeted, and then, despite the stimulus of loose monetary policy, it took the S & P 500 more than five years to return to its pre-crisis level. The NASDAQ probably took four years to recover its decline.

At the beginning of the COVID-19 epidemic in the United States last year, US stocks also suffered a short-term sharp fall, but after the introduction of the Fed's easing policy, US stocks rebounded quickly and not only recovered their losses, but the S & P 500 also rose 16 per cent last year, and the Nasdaq rose as much as 44 per cent.

Not only did the wealth of American residents rise sharply last year, but their incomes also rose sharply.In previous recessions, unemployment increased and the growth rate of disposable income of American residents declined significantly. For example, after the outbreak of the subprime mortgage crisis in 2007, the growth rate of US household income fell sharply, and did not return to growth of about 5 per cent until 2011-2012. But last year, when the COVID-19 epidemic hit the economy, the income growth rate of American residents not only did not decline, but increased from 3.7% in 2019 to 7.0% in 2020, the highest growth rate since 2007.

The reason why the growth rate of American residents' income has risen rather than declined is mainly due to the "distribution of money" by the Federal Reserve.The most different thing about this round of US monetary stimulus is that the Fed "gives money" directly to unemployed residents through the US Treasury. According to a study by the University of Chicago, after the enactment of the CASE Act, 68 per cent of the unemployed in the United States received higher unemployment benefits than their pre-unemployment income.

The reason why there is no damage to the balance sheet of American residentsInstead, it benefited, mainly because the Fed used all monetary policy tools more quickly last year than it did during the financial crisis.After the outbreak of the financial crisis in 2008, the Federal Reserve's easing measures were launched one after another, and QE was also done round after round, so the US real economy fell into the mode of debt deflation at that time. After that, under the continuous monetary stimulus, government departments increased leverage to promote residents and enterprises from deleveraging to leveraging, and the real economy gradually recovered.

What is different about this round is that in March last year, the Fed cut interest rates directly to zero and announced an "unlimited" QE to cooperate with the US Treasury to spend heavily to prevent the economy from falling into debt deflation. Moreover, the mode of giving money to unemployed residents is also different from that of the last round, which directly ensures that even if the recession brings unemployment, the income of residents has not been reduced, thus ensuring the ability to spend. So in terms of total debt, American residents and companies did not deleverage last year, but government departments quickly increased leverage and took on most of the economic risks.

2.Spending power has soared: structural inflation has already soared

Historically, personal income and consumer spending in the United States have generally shown a relatively consistent trend, but there was a historic deviation last year, with a gap of more than 10%. Although residents' wealth, income and spending power have increased, consumption in the United States still grew negatively by 3.1 percent for the whole of last year.

Is American consumption really bad? In fact, if you look at the structure, American consumption last year was not bad at all.In the fourth quarter of last year, the growth rate of US consumption of physical goods rose to 6.8 per cent, the highest since the end of 2004. In particular, consumption of durable goods grew by more than 11 per cent in the third and fourth quarters.

Overall consumption looks weak, mainly because consumption of services is relatively weak. As of December 2020, US consumption of services was still negative by 6.8 per cent, with a gap of about 14 percentage points with consumption of goods. The weak consumption of services is not due to the lack of spending power of residents, but mainly because of the prevention and control of the epidemic, and the mobility and aggregation of the population are still restricted.

The performance of US inflation is also similar to the change in consumption.Although overall inflation in the US is not high, only 1.4 per cent of CPI and core CPI reached 1.5 per cent as of January this year. But structurally, consumer inflation in physical goods has risen to 1.7 per cent, the highest level since April 2012, especially in durable goods, which has reached its highest level since the 1990s.

Us service consumption inflation is still falling, falling to 1.3 per cent as of January, the lowest since December 2010. In addition, although the level of inflation in energy consumption is rising, it is still negative by 3.6% in the year to January.Visible, dragged downCPIThe key variables are service consumption and energy consumption, in fact, these two variables are dominated by the same reason, because aviation and transportation will also affect energy demand, so in the final analysis, service consumption is relatively weak.

With the acceleration of vaccination in the United States and the gradual control of the epidemic, the consumption capacity of residents has increased again, and the consumption demand for services will soon return to normal in the future, thus driving the upward movement of the overall consumption and inflation center of the United States.

Inflation expectations in the United States have risen sharply.By the end of February, US five-year inflation expectations rose to 2.34 per cent, the highest level since May 11, while 10-year inflation expectations rose to 2.14 per cent, the highest level since August 14.

As the Fed's stimulus intensity, speed, method, and history are different, residents' spending power has risen instead of falling, the economy has not fallen into a debt deflation model, and part of the economy has shut down only because of short-term factors in epidemic prevention and control. therefore, once the prevention and control of the epidemic improves, this round of economic and inflation repair in the United States will be much faster than any previous economic cycle.

3.Employment repair: it will also be the fastest in history.

Judging from the employment indicators in the United States, the service industry is also a major drag at present.As of January this year, US employment in commodity production was only more than 900,000 lower than in February last year, while employment in service production fell by about 9 million, accounting for 91 per cent of total unemployment. Among the service industries, leisure hotels and education and health services suffered the most, with 3.88 million and 1.33 million unemployed respectively.

The unemployed are mainly low-paid workers.Last year, the average hourly wage of US non-farm payrolls was 4.8 per cent year-on-year, a record high, especially in the service sector, which rose to 5.2 per cent year-on-year and grew by as much as 9.0 per cent in April last year.

The wages of those employed have also increased significantly, mainly because most of the unemployed are low-income workers, and the average wages of those who remain after they have dropped out of the labour market have increased.Us employment tracking data show that by the end of January this year, the employment situation of low-income workers was still down 24.2% compared with January last year, while high-income workers had become regular workers as early as October last year.

But this time the US unemployment rate will also be repaired significantly faster than in other cycles.According to the economic cycle divided by NBER, in the 11 cycles in the United States since 1948, the unemployment rate quickly peaked within 11 months on average, while it took an average of 58 months to return to the low point. The longest one took 120 months to fully recover after the unemployment rate peaked in March 1991.

However, this round is different. due to the impact of the epidemic, the unemployment rate peaked in just two months; however, as most of the unemployed were temporarily unemployed, after the economic blockade was gradually lifted, the unemployed returned to work and the unemployment rate began to decline rapidly. In just nine months, the unemployment rate in the United States has fallen from a high of 14.8% to 6.3%, a rate rarely seen in any economic cycle.

Moreover, this round of unemployment in the United States is mainly contributed by the service industry, and the depression in the service industry is not due to the lack of spending power of residents, but because of the short-term impact of the prevention and control of the epidemic. Once the prevention and control of the epidemic is liberalized, consumption and inflation in the service industry in the United States will pick up, which will directly lead to a rapid rebound in service industry employment.

What's more, the current model of giving money directly to unemployed residents in the United States has itself pushed up the unemployment rate in the United States in the short term.Take the leisure and hotel industries, where unemployment is more serious, where the average weekly salary of employees before the outbreak was only about $430, while unemployment benefits received by the state and federal governments after unemployment could reach $800 or more.

Therefore, the income of residents in the state of unemployment is higher than that in employment, and the residents naturally have no motivation to look for a job. Once the prevention and control of the epidemic in the United States improves and inflation rises, subsidies to unemployed residents will also fall, and the motivation for employment will be significantly increased. We believe that the unemployment rate will fall at the fastest rate in history.

The current epidemic in the United States has improved significantly, with fewer than 80,000 new cases a day (a seven-day moving average) and a sharp decline in daily deaths. At the same time, daily vaccination in the United States is still relatively fast, with an average daily vaccination dose of 1.5 million in the past week as of February 24, accounting for 6.5% of the population who have completed the vaccination.Ahead of other major developed economies, second only to Israel and Serbia. Looking ahead, as the epidemic improves, the economy, inflation, and jobs in the United States will all be repaired at the fastest pace in history.

4.How high will inflation be?Policy withdrawal will also be quick.

In the inflationary structure of the United States, the weight of services is very high.According to data released by the US Department of Labor, the highest residence weight in the US CPI composition is more than 40 per cent, followed by food and beverage and transportation, with weights of about 15 per cent.To sum up again.In 2020, the weights of commodities and services are 37% and 63% respectively, of which the weight of energy is about 6%, and the weights of core goods and core services are 20% and 27%, respectively.

Although the weight of energy is relatively low, due to the volatility of crude oil, energy in the United StatesCPIYear-on-year and overallCPIThe year-on-year trend is more consistent.

Starting from the second quarter, we believe that inflation in the United States may rise to3%Above, and then hover in the high position.Considering the low base in the second quarter of last year, both the US CPI and the core CPI will rise sharply in the second quarter of this year compared with the same period last year. After that, with the advance of vaccination in the United States, some prevention and control measures will be liberalized, and the prices of services such as rents and transportation will be obviously repaired to maintain high inflation in the United States, which is easier to go up than down.It can be said that this round of inflationary pressure in the United States may be08The biggest one since 20 years.

Once the epidemic abates, the current round of US inflation is likely to rise very quickly.Although the Fed has increased its tolerance for inflation, overall inflation of more than 3% may still have a big impact. And this round of rising inflation itself will lead to faster job repairs and change the Fed's forecasts for the economic outlook. Historically, the Fed will not wait for the unemployment rate to fall to its lowest level before it tightens.

So this round of Fed easing will also exit much faster than during the financial crisis.Although it is highly unlikely that the Fed will take action this year, there is no need for practical action to affect the market. For example, the Taper of the Federal Reserve in 2013 took place at the interest rate meeting in December, but in fact, the outlook for the economy changed and began to discuss the issue of Taper, so gold and silver fell sharply in 2013.This year3-4The quarter, which may be a key point in the shift in the Fed's forward guidance on the economy, needs to be focused.

Therefore, we believe that US bond interest rates may maintain the upward direction, and the dollar index also has the momentum to rebound, which will have a greater impact on the global financial markets.