U.S. employment has fared better than the market

U.S. employment has fared better than the market expected. I think there's some connection between the asset market and consumption and employment indicators. The asset market has seen a sharp rebound since November of last year. U.S. consumption that was supposed to collapse recovers, and service employment that had collapsed. And this recovery in service employment stops wage growth from slowing down. It seems like it's throwing the message back into the market that we shouldn't look at inflation too easily. But market participants are going to cut interest rates even if they're a little late. They're going to cut interest rates, but they don't seem to think it's a big deal. That's the trend in recent chapters.

Now I'm going to write down the final round of the 2024 annual outlook. I was going to continue with one or two more episodes, but I think it's a little too much, and the recent trend in the market also needs to be catch-up, so I'm going to continue with a little bit after finishing this circuit. Let's just summarize what went on to the fourth part. Part one mentioned market confidence. I mentioned market confidence, unlike in the past, that in the end the Fed will release money ... and John Burr will always win. Their confidence will give them the strength to withstand a tight financial market. That will control the coming of a strong recession. That will reduce the possibility of sharp interest rate cuts. And rising asset prices will point to inflation.

In part two, we wrote down five issues to look out for in 2024. Geopolitical instability, political risks from elections, changes in the U.S. fiscal deficit and the Fed's monetary policy, and finally, we talked about sticking to inflation. And we emphasized that the first four points to sticking to inflation at the end of the day. And eventually, it comes to five things, but it still converges to the fact that inflation can hold back.

In part three, I wrote about the dark cloud of the short-term financial markets. And that's where the markets remembering the 2019 repo crisis can feel a lot of anxiety. The markets know that once growth slows down, it quickly collapses. And that cracks in the repo crisis and so on can be a catalyst to stimulate it. But I explained to you that there are tools like the standing repo that are different from those of 2019, and that there is the know-how of the Fed that passed the SVB crisis last year. It can create the possibility of a sharp interest rate cut, but I just told you that there are ways to solve it without switching to a money release package such as a quick rate cut.

In part four, we talked about volatility. This is one-way tropes, which, when you engage with the confidence that the market has in part one, shows a significant explosive force. And when you create one direction, you get a rush in that direction, and when that rush goes overboard, it turns sharply in the opposite direction. It's similar to what we saw back in 2023, and it eventually has a significant connection to the sentiment of the market.

The confidence that the market has creates enormous volatility. For example, when a nearly dying market meets a pivot expectation ... that pivot expectation creates confidence, leading to a bold shift toward the asset market. And in the bond market, hedge funds' bond-buying play turns interest rates below. That's how the interest rate goes down turns the pivot expectation into certainty. And with that confidence, the asset market strengthens ... and the tight financial environment soon becomes more relaxed. That was the trend from November to December. But one of the big risks is that this easing of the financial environment will again stimulate consumption and inflation. Especially for the Fed, which has already failed to properly address inflation for three years, rising inflation again can make them more nervous than expected.

And the Fed will worry about two things. One is the fear that it could be Arthur Burns, and the other is that it doesn't want to be Mieno. Mieno was governor of the Central Bank of Japan in the early '90s. He broke the Japanese real estate bubble by raising the benchmark interest rate sharply. When real estate prices collapsed, Mieno was consistent with his toughness to completely root out speculative sentiment rather than trying to support the shock through quick interest rate cuts. Japan, which has been completely shocked by the asset bubble burst without the central bank's cushion of interest rate cuts, will enter a "lost quarter century." Mieno's mistakes mean excessive austerity, and the central bank's failure to pivot in a timely manner. Powell, who has already made rapid rate hikes, must be worried that unless the right time is right, he could become like Mieno.

But if you talk about the transition here, suddenly, a lot of liquidity flows and it re-stimulates inflation. And it could become entrenched and turn into a decade of inflation like the '70s. The mistake of Arthur Burns, the Fed's chairman in the '70s, was "Stop & Go." For example, what medication would be best if you took it consistently… If you don't listen to your doctor, you stop taking it when it gets a little bit better, but if it gets worse, you try to take it again. Eventually, you don't try to tighten and suppress inflation perfectly, but you do it again and again, and again, and again, and again, and again. Arthur Burns is one of the worst in the history of the Fed. And for Powell, it would be quite burdensome to be like Arthur Burns. And we're at a crossroads. If we switch to lower interest rates, it could be Arthur Burns. If we cut more carefully, we could be a mieno. Is it possible to choose between the two? We'll have to think about it over and over again. This is where the Fed is right now. Wouldn't it repeat this and over and over again? That's why the Fed is going back and forth. I think the Fed's back and forth will continue this year.

The Fed wants to do something about a policy shift ... and the market is heavily armed with confidence and learning about the Fed. It's become the teacher who has to tame the most brilliant students of all time ... And unlike the Fed trying to tame the market, the market is trying to respond with how to train your Fed. It's true that the Fed is not going to be easy, but one thing here is ... If the Fed knows what's going on ... you might want to think about maybe taking advantage of that. Let's move on.

Whether to cut interest rates or not is a significant burden. If you cut interest rates, you might see inflation stick, and if you don't, you might have a recession. If you can't do it or can't do it, what do you do? Then you can choose to do it and not do it. You'll feel like, oh man, what nonsense that is... Just a little look at it. The Fed has announced three base rate cuts, and the market is reading seven. If you look at the market rates in the bond market, rates are already down, as if they were reflecting the Fed's seven rate cuts. Yeah. Even if the Fed didn't cut rates, our confident market just ran and made the cut. So, didn't it cut rates without lowering them? Then the Fed just did it work without having to play cards. In fact, the market situation, which had been struggling with high interest rates until the end of October, has been exacerbated by November and December… from the Fed's point of view, don't you think that they did gaslighting properly? You might think, does that make sense… Even when we were raising rates in 2022, the Fed did this way, and it did not raise rates.

In response to the harsh rebuke of why the Fed delayed its base rate hike in June 2022, Bullard and Waller, two of the Fed's leading hawks, have already hinted at a base rate hike through forward guidance, which prompted a rise in market rates, claiming that they had already had the effect of raising rates before they did. Let's quote an article at the time. Take a closer look.

"Fed board member Christopher Waller and Federal Reserve Bank of St. Louis Governor James Bullard said at a Hoover Institute-hosted monetary policy conference on Thursday that the Fed has new tools to help curb inflation this year: "Forward guidance." (Opt.)

He said the Fed's guidance raised the two-year Treasury bond rate from 0.25% at the end of September to about 0.75% at the end of December. "This is like raising the policy rate twice, 25 basis points, to affect the financial market," Waller said. "If the forward guidance actually shows that interest rate hikes began in September last year, how behind the curve will we be?"

"The modern central bank is much more reliable than it was in the 1970s and is using forward guidance," Bullard also said. "The Fed is not that far behind," he argued, pointing to a substantial increase in market interest rates before the Fed's actual action, i.e. a key rate hike. (Joint Infomax, 22.5.9)

Yes, we did the base rate hike late, but we insist that it's not slow because the actual market rate jumped first. It's going to be a case where the Fed makes the most of the market's attributes. So, will we use this method when we cut interest rates? It shows the effect of six cuts even though we haven't even started cutting rates. So, is it necessary to cut quickly when there's still a risk of inflation sticking? Just by talking, the market is moving on its own… lol

It could be a Mieno... it could be Arthur Burns. They're both worst-case scenarios for the Fed. You're going to have to do some real good out of that fear. The best way to do that would be to have an action-free effect. And that would be to keep the market moving while minimizing the Fed's action. And because the Fed hasn't really taken a step back, if inflation is getting stronger even after it's headed for a rate cut, it can immediately reverse the policy. There's room to reverse the policy