First class warehouse research report: macro analysis of economic policy and encryption market
The current world is in a turbulent period, with uncertainty flooding the whole market. Therefore, the rapid change of the macro environment highlights the necessity of macro analysis at this time. Only by mastering the trend can we better avoid risks and look for future opportunities. In this article, we will start from the macro perspective and the game between the market and the Federal Reserve to analyze the current situation of high inflation faced by the market and the possible future crises and recessions.
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Macro analysis summary
The current world is in a turbulent period, with uncertainty flooding the whole market and risk factors emerging everywhere. These include:
1) The monetary policy risks of the Federal Reserve and the European Central Bank.
2) The business cycle of Europe and the United States turned, and China's economic recovery was weak.
3) Geopolitics continued to be volatile, and the Russia Ukraine war continued to affect the macro market.
4) Europe and Japan are worried about the debt crisis.
5) COVID-19 continues to change old economic perceptions and form a new normal.
Therefore, the rapid change of the macro environment highlights the necessity of macro analysis of the market at this time. Only by mastering the trend can we better avoid risks and look for future opportunities. In this article, we will start from the macro perspective and the game between the market and the Federal Reserve to analyze the current situation of high inflation faced by the market and the possible future crises and recessions.
1. Misjudgment of market policy
Since entering the tightening cycle, the Federal Reserve has been one of the most important factors affecting the current market. For the market, following the guidance of the Federal Reserve is often the most efficient choice. However, since June 2022, the market and the Federal Reserve have entered a game period under the influence of the Federal Reserve's policy uncertainty. In this process, the market made a certain miscalculation of the Federal Reserve's policy, which has a negative impact on the future market trend. Starting from the policy objectives of the Federal Reserve, this paper will describe the game strategy of the market, the possible policy changes of the Federal Reserve in the future, and the corresponding market prospects.
The game between the market and the Federal Reserve is mainly manifested in the change of market interest rate. In the process of this game, the Federal Reserve, as the leader, controls the change of the federal benchmark interest rate and has the initiative; As a subordinate, the market reacts to the policy interest rate, which in turn affects the change of the market interest rate. The Federal Fund Interest Rate of the Federal Reserve is usually leading and leading the change of market interest rate. However, in some special cases, the simple following relationship between the two will change significantly.
Figure 1-1; Policy interest rate and market interest rate 
From Figure 1-1, we can see that the Fed's forward-looking guidance is effective in most cases. In the long run, the yield of US Treasuries will change in the direction expected by the Fed. However, due to the information difference between the market and the Federal Reserve, the market and the Federal Reserve sometimes play a short-term game, and make a relatively obvious miscalculation of the policy in the game process.
Figure 1-2; Misjudgment of market policy
Specifically, the reason why the market has misjudged policies and strategies is that the Federal Reserve will make different policy orientations in different environments. According to the Federal Reserve Law of the United States, the objectives of the United States monetary policy are mainly two:Control inflation and promote full employment。 These two targets correspond to two important indicators concerned by the Federal Reserve, namely, inflation rate and unemployment rate. The inflation rate and unemployment rate respectively reflect the changes in the supply and demand of the commodity market and labor force, indicating the position of the boom cycle.
The changes of inflation rate and unemployment rate are generally divided into the following four situations:
High inflation and high unemployment:Corresponds to the middle and end of stagnating inflation. According to traditional economics, the main reason for this situation is insufficient aggregate supply or excess aggregate demand. In this case, it is more important and feasible to control unemployment than inflation, because at this stage, monetary policy will lose efficiency or cause more serious unemployment. Therefore, the policy should focus on fiscal policy to stimulate the total social supply, bridge the gap between supply and demand, and also increase employment.
High inflation and low unemployment:It corresponds to the early stage of stagnating inflation, the high point of ordinary inflation or business cycle. Generally speaking, at this stage, the direction of monetary policy is uncertain, because not every high point of the boom cycle will cause inflation, nor will every inflation turn into stagnant inflation.This stage is often the market and the Federal ReserveThe main stage of the game.
Low inflation, low unemployment:Corresponds to the normal range of the boom cycle at the initial stage of deflation. This stage corresponds to the economic normality faced by stable economies, especially those of developed countries. At this stage, there is generally no need for special economic policy intervention.
Low inflation, high unemployment:Corresponds to the middle and late stages of deflation or the low point of the business cycle. The main problem reflected at this stage is actually the insufficient aggregate demand of the society. Therefore, both fiscal policy and monetary policy should make efforts at this time to reverse the expectation of deflation.
From the above four situations, we can find that the policies implemented by the Federal Reserve and its interaction with the market are determined in most cases. Only in the environment of high inflation and low unemployment can the two sides play games, that is, the current market situation.
In the environment of high inflation and low unemployment, the possibility of "pre stagflation" is far greater than that of "ordinary inflation" and "the high point of the business cycle". "The high point of the business cycle" and "ordinary inflation" are usually normal phenomena in economic fluctuations, which will not have a lasting impact on the economy. Therefore, the Federal Reserve generally does not adopt aggressive tightening policies. Even if tightening is carried out, during the process, the Federal Reserve of China and the United States will always take into account the growth of the economy and adjust or stop the tightening policy at the right time. In this case, the best strategy for the market is to avoid risks at the beginning of the tightening and copy the bottom when inflation reaches its peak. Because according to the Philip Curve, the peak inflation will lead to the increase of the unemployment rate, and the Federal Reserve may relax the tightening after seeing the increase of the unemployment rate.
However, stagnating inflation will continue to induce self fulfilling inflation expectations and form stubborn inflation, which will have a devastating impact on social production. As a result, the Federal Reserve tends toAdopt aggressive austerity policiesWith a view to reversing inflation expectations. under these circumstancesBefore the inflation expectation is completely reversed and the inflation target is returned, the Federal Reserve is unlikely to relax its tightening. In this process, the market will not have a predictable policy change point of the Federal Reserve.In this case, the best strategy for the market is to wait for inflation to fall back to the inflation range, or the Federal Reserve sends a clear signal of policy change.
The difference between the market and the Federal Reserve is that,The market generally believes that what the United States is facing now is"The high point of the economic cycle”Or"Ordinary inflation”。Previously, although the Federal Reserve insisted that the United States was facing "the high point of the economic cycle" or "ordinary inflation", the actual practices and measures were more radical. The disagreement of the Federal Reserve caused the market to misjudge the strategy in June August, thinking that the Federal Reserve's interest rate increase cycle had reached its peak, so the risk market experienced a big rebound.
Figure 1-3 Misjudgment of the market from June to August 2022
Figure 1-4; Federal Reserve Balance Sheet; 
Faced with the optimism of the market, the Federal Reserve kept emphasizing its policy objectives, raised interest rates by three yards at the interest rate decision-making meeting at the end of July, and accelerated the reduction of the statement in August. Finally, after entering September, the market began to wake up to its misjudgment in strategy and began to re price risks, which also opened the prelude to the second round of market correction. In the second round of revision, the discussion on the nature of inflation began to re-enter the market's vision. Whether and when inflation will fall back this time will help us make a reasonable judgment on the market outlook in the future.
2. Hyperinflation starts
The study of inflation is one of the most prominent branches of economics. There are countless theories and viewpoints trying to demonstrate the causes and effects of inflation. However, on the whole, we must adhere to the principle of specific analysis of specific issues, and analyze the special points of this inflation from several logics, as well as our views on the possible future crisis.
Inflation, in essence, is a phenomenon of market supply and demand in the form of money under a specific space-time background.
So its core points are as follows:
1) It has a specific space-time background.Inflation is often confined to a country for a period of time. Universal and permanent inflation does not exist, because the crisis triggered by inflation will destroy production, restrain demand, and finally make the economy enter a new normal.
2) In monetary form.Inflation is a price indicator, which is measured by currency rather than the actual exchange value of the market. Therefore, the value of money itself is also an important consideration of inflation.
3) It is a phenomenon of market supply and demand.This is easy to understand, because the price itself is the result of the supply and demand game.
Therefore, we will analyze the causes of inflation from these three perspectives.
First of all, this inflation started in the first quarter of 2021. At this time, the United States is at the time of political transition, so there are several special time and space backgrounds in specific policies:
1) One year after strict epidemic control was implemented, American states began to loosen epidemic control measures in an all-round way.
2) After the Democratic Party came to power, Biden signed a 1.9 trillion dollar economic rescue plan and a new bailout bill in March.
The change of epidemic prevention policy and economic policy ignited the torch of inflation, and then the excessive issuance of currency added fuel to the inflation.
Figure 2-1; Federal Reserve Balance Sheet; 
At the beginning of 2020, the economic downturn in the United States superimposed on the COVID-19 epidemic, resulting in a large-scale US dollar liquidity crisis. Therefore, the Federal Reserve took such unprecedented measures as "zero interest rate + unlimited QE" to try to restore market confidence. In this process, the balance sheet of the Federal Reserve doubled from about 41 trillion yuan to 89 trillion yuan, the highest point, and poured a huge amount of liquidity into the market.
Figure 2-2; Treasury bond issuance; 
The issuance scale of US government bonds has almost doubled or tripled before the epidemic, the leverage ratio of government departments has soared, and the over issued government bonds have finally entered the market through QE policy.
Figure 2-3 Proportion of US government debt to GDP; 
Figure 2-4 US Money Supply M2; 
Figure 2-5 US Money Supply M1 
During the epidemic, the broad money supply M2 of the United States increased by about 44%, and the narrow money supply M1 increased by 311%. The scissors difference between M2 and M1 quickly converged to an unprecedented level, which at that time injected a large dose of heart strengthening needle into the US economy in crisis and helped the economic recovery. However, at the same time, a large amount of money has been over issued, which has seriously damaged the real purchasing power of money. In particular, the popular "helicopter money" has made the financial market, which was originally a money reservoir, unable to bear such a large amount of money over issued, and the fire of inflation has gradually become fiercer.
The most basic supply and demand logic of the market began to slowly change, making the energy of inflation completely released.
We divide the supply and demand logic into production side and demand side:
The ebb of globalization and supply chain crisis on the production side are accelerating:
1) The ebb of globalization is accelerating:
From the ratio of global trade to GDP of the World Bank, we can see that since the outbreak of the global financial crisis in 2008, the proportion of trade has continued to decline, and contrary to the common sense of most people that globalization is led by developed countries with damaged interests, the leaders of this wave of global recession are China and the United States.
Figure 2-6; Ratio of world trade to GDP; 
Figure 2-7; Trade dependence of major economies in the world (1970=100)
It can be seen that since 2006, China's trade dependence has declined significantly. Although the absolute value of China's foreign trade is still rising, the relative proportion has peaked. This led to the first wave of globalization recession after 2008.
Figure 2-8 Trade dependence of major economies in the world except China (1970=100)
It can be seen that the trade dependence of the United States has also decreased significantly since 2011, but the trade dependence of the EU and Japan is still in a spiral phase. The decline of US trade dependence confirms the trend of globalization.
2. Supply chain crisis:
Strictly speaking, the supply chain crisis is inevitable for the ebb of globalization, but the epidemic situation and the Russian Ukrainian war have aggravated this situation.
The Russian Ukrainian war broke the chain between upstream raw materials and midstream processing and manufacturing, and the epidemic situation broke the chain between midstream processing and manufacturing and downstream commodity retail. At the same time, the soaring sea freight price caused by poor logistics has further aggravated the situation of supply chain crisis.
Figure 2-9 Baltic Dry Bulk Index; 
On the one hand, the supply chain crisis has resulted in the accumulation of inventory in the upper and middle reaches, and the shortage of supply in the lower reaches, which has aggravated the situation of demand exceeding supply; At the same time, some production capacity relying on supply chain management has been eliminated in the market competition because of the loss of economy. The loss of this part of production capacity has led to a decline in the total social output.
There are also two obvious trends on the demand side:1. Overall inflation is taking shape very quickly.
Figure 2-10; Energy inflation; 
Energy inflation will quickly start in the first quarter of 2021, rising to more than 20%.
Figure 2-10 Service Inflation; 
Figure 2-11 Rent inflation; 
Figure 2-12 Food Inflation; 
The soaring food inflation in the second quarter of 2021 marks the official start of comprehensive inflation.
Fig. 2-13; Retail sales (history) 
The retaliatory consumption after the deregulation of epidemic control, together with the vast amount of cheap funds provided by the New Crown Relief Act, has become the main engine for the rapid start of comprehensive inflation.
Fig. 2-13; Retail sales (5 years) 
From the data point of view, this comprehensive inflation even skipped the stage of structural inflation, and quickly formed in a short time. From the first quarter of 2021, with the Democratic Party coming to power, the deregulation of epidemic control measures, coupled with the massive monetary easing, and the recovery of the economy, the above factors led to the successive rise of energy prices, service prices, rental costs and food prices. After more than a year of fermentation, under the catalysis of the Russian Ukrainian war in the first quarter of 2022, the overall inflation was completely out of control.
2. This inflation is stubborn and self fulfilling.
The obstinacy is reflected in two characteristics of this inflation:
Widespread coverage:Involving commodity trade, service trade, capital market,
Large range:It is far higher than the acceptable range of 2% of the inflation target.
Self realization is simply the self realization of inflation expectations. When prices are expected to rise in the future, consumers will tend to buy more goods in the current quarter in an attempt to avoid the impact of inflation in the future. The emergence and fermentation of sticky inflation, as well as the passive growth of wages with prices, will undoubtedly accelerate and solidify consumer inflation expectations, leading to inflation into a vicious circle of self realization.
Figure 2-14; Sticky Inflation Data; 
The sticky price consumer price index (CPI) is calculated based on a subset of goods and services that contain relatively infrequently changing prices. Because the prices of these goods and services change relatively little, it is believed that they can better reflect the expectations of future inflation than the prices that change more frequently. One possible explanation for sticky prices may be the costs incurred by companies when changing prices. The rise of the sticky price index means that inflation itself will become more stubborn.
In addition to inflation stickiness, we can also observe the obstinacy and self realization of inflation from the perspective of wages.
Figure 2-14 Average Hourly Salary of the U.S. Private Sector; 
It is difficult to see the rate of wage increase from the image.
However, if we look at the data, it takes less and less time for the average hourly wage in the United States to increase by 2.5 dollars, which means that the wage increases faster and faster.
Table 2-1 Time Spent for Every 2.5 USD Increase in Average Hourly Salary in the United States
There are two main reasons for wage increase since the epidemic:
Supply side:COVID-19 has caused chaos in the US employment market, resulting in mismatch between supply and demand of human resources. At the same time, due to the impact of the disease itself, a large number of workers lost their ability to work or were unable to participate in labor, expanding the output gap.
Demand side:On the one hand, the rapid liberalization of epidemic prevention and control has led to a rapid recovery in the demand for services; on the other hand, the rising inflation has forced business owners to pay workers higher wages to attract workers.
Under the dual strike, the contradiction between supply and demand in the labor market has intensified rapidly, and it is manifested in the form of rapid wage rise.
According to Keynes' theory, wages will be rigid in a short time, so once production starts to decline, unemployment will occur. But at the same time, the inflexibility of wages also means that the wage level pushed up by inflation will not decline in a short time. According to the definition of the demand curve, the rise of wages will cause the entire labor demand curve to shift to the right. When the supply curve remains unchanged, prices will naturally rise, thus forming a continuous "inflation wage rise inflation" situation, which is the self realization of this inflation.
The obstinacy and self realization of inflation in labor demand means that all demand control without external force may not be able to effectively bridge the gap between supply and demand. The market may face a fundamental demand side clearing to balance the total social supply and demand.
From these three perspectives, we can draw the following conclusions:
1) The current inflation occurred about after the rapid bottoming out of Europe and the United States caused by the COVID-19 epidemic, and then quickly pulled back. The main places of occurrence are Europe, which is still at the peak of the boom, and the United States, which has seen the peak of the boom.
2) The over issuance of currency in Europe and the United States during the epidemic is one of the most important causes of inflation.
3) According to general experience, this inflation cannot be limited on the production side, that is, the output gap cannot be narrowed by expanding production capacity. At the same time, there is no precedent in history that can eliminate the impact of such large-scale water release. Therefore, we can only solve the inflation problem from the demand side in the future.
From the above specific time and space, capital and supply and demand, we can clearly find that this inflation has some very unusual characteristics compared with the inflation in the past 40 years. As for the upcoming recession risks and warning signs of the crisis, we will describe them in the third part.
3. The crisis warning sounded
Generally speaking, the economic crisis is mainly manifested in two forms: a deflationary economic crisis and an inflationary economic crisis. Before the second industrial revolution, the economic crisis within the time frame was mainly manifested as an inflationary economic crisis. But after World War II, with the progress of productivity and globalization, the inflationary economic crisis almost disappeared. It has been 40 years since the last typical inflationary economic crisis, the 1979-1982 capitalist world economic crisis. It can be said that governments and central banks have forgotten the horror of releasing the devil of inflation crisis from the cage.
In view of the extraordinary speed and intensity of inflation this time, we believe that the probable inflation rate will evolve into an inflationary recession.
We use a table and four dimensions to briefly describe the difference between an inflationary recession and a deflationary recession
Fig. 3-1; US Inflation Rate; 
From the figure, we can see that the development of comprehensive inflation has broken through the range of the past 40 years, and has met the necessary conditions to develop into an inflationary recession. In addition to the data level, under the general background, there are similarities between the current inflationary recession and the one 40 years ago. For example, the second oil crisis corresponds to the Russian Ukrainian war. Paul Volcker's radical interest rate increase by the Federal Reserve corresponds to Powell's radical interest rate increase.
At present, as the economic and policy trends become more and more clear, we can be sure that the next recession will probably be an inflationary recession. As for the question of when the crisis and recession will come, the spread of US short-term and long-term treasury bonds is an important leading indicator of the recession and gives a warning.
Figure 3-2 US T-bond spread;
The interest rate spread of short-term and long-term US Treasuries is a warning light of the crisis. Since the establishment of this indicator, every upside down of the interest rate spread of short-term and long-term US Treasuries will correspond to a large-scale recession, with no exception up to now.
There are many angles to understand why the US short-term and short-term interest rate differentials cause the recession. Here, we only analyze from three perspectives: policy guidance, interest rate pricing and the underlying logic of the financial market.
1. The upside down of long-term and short-term interest rate differentials means the failure between policy guidance and market regulation.Generally speaking, we regard the 2-year bond interest rate as the policy interest rate expected by the market, that is, the market's expectation of the Federal Reserve's future adjustment range of the federal fund interest rate. The interest rate of 10-year treasury bonds means the nominal interest rate faced by the market. When the difference between the two interest rates decreases, it means that the Federal Reserve has entered a tightening cycle. Generally speaking, the Federal Reserve will gradually raise the federal funds interest rate to the upper limit of the interest rate acceptable to the market, but there will also be special circumstances, where the policy guidance interest rate of the Federal Reserve will exceed the upper limit acceptable to the market, that is, the long-term and short-term interest margin will be inverted. That is to say, under normal circumstances, the market has been unable to accept the interest rate guidance of the Federal Reserve, so there will be a large-scale market clearing, that is, recession.
2. Interest rate is the cost of capital.An important point in interest rate pricing is the risk premium. The higher the risk, the higher the relative interest rate required. This part of the increased interest rate due to increased risk is called risk premium. Generally speaking, the risk will increase with the time of payment collection. Therefore, the long-term interest rate must be higher than the short-term interest rate under normal circumstances. The reduction of the long-term and short-term interest margin means that the short-term risk is rapidly increased, and the upside down means that the risk is near. The inverted range can directly reflect the time period when the crisis may occur. At present, the 1-year and 2-year treasury bonds have become inversely linked in the term structure of US treasury bonds, which means that the market believes that a crisis is very likely to occur within one year.
3. The bottom financial market,Especially in the banking industry, the basic logic of the insurance industry is to use the interest margin between long and short bonds to make profits while ensuring liquidity. The reduction of the long-term and short-term interest margin will narrow the space for making profits. Once it is upside down, it means that the arbitrage space not only disappears, but banks and insurance companies have to subsidize short-term capital costs. At the same time, due to the particularity of national debt, the rapid rise of national debt interest rate also means the rapid decline of national debt price. As reflected in the balance sheet, banks and insurance companies will have to recognize a large number of asset losses, so they must sell some of their assets to make up for capital, thus forming a passive shrinkage. Therefore, the inversion of long-term and short-term interest rates will shake the cornerstone of the financial market from many aspects, resulting in the bursting of the foam on the asset side and the liquidation on the debt side.
When we look back and put the difference between inflationary recession and deflationary recession into the long-term and short-term interest rate spread chart, we can clearly see that the two inflationary recessions in 1980 and 1982 occurred at the moment of the transition of long-term and short-term interest rate spread, that is, when the Federal Reserve said it might adjust monetary policy, a large-scale economic recession occurred in the negative range. The subsequent four deflationary recessions occurred a period after the transition of short-term and short-term interest rate differentials, that is, after the Federal Reserve just entered the easing cycle from the tightening cycle, the long-term and short-term interest rate differentials became positive. The reason is that the crises triggered by the deflation recession come from the gradual clearing of the debt side, which is naturally formed, while the crises triggered by the inflation recession often come from the collapse of the asset side, which is deliberately guided by the Federal Reserve. Therefore, the crisis triggered by a deflationary recession tends to occur some time after the end of the tightening cycle, while an inflationary recession tends to occur at the highest point of the tightening cycle.
From this perspective, we can draw the following conclusions:
1. The probable inflation rate will trigger an inflationary recession, and the elements of crisis and recession are already in place.
2. The time point of the crisis is judged according to the interest margin of long-term and short-term government bonds. In about half a year, the recession will last for one to two years.
3. There are two indicators to judge the specific time of the crisis: the unemployment rate is rising, leaving the boom zone; The Federal Reserve released the policy turning signal, and the long-term and short-term interest rates stopped hanging upside down.
The last words
The current crisis we are facing is broadly similar to the crisis of the 1980s. Stagnant inflation, oil crisis, US Japan trade war/US China trade war. Behind the multiple coincidences is the stagnation of the development of human productivity. After more than 30 years of development, the information technology revolution has had to re seek the direction of productivity growth. The bad news is that an era is over, the cold winter is coming, and the cold is about to hit us all; The good news is that blockchain technology may represent the next era of technological revolution. In fact, the economic downturn and the collapse of asset prices did not excessively affect the development of technology. Most of the greatest Internet companies we are familiar with today developed steadily after the foam burst at the beginning of the century. For value investors, now is the best time to observe team development and participate in early projects. For a wide range of price speculators, it should also be optimistic about the future: the recovery of the cryptocurrency world is likely to be much ahead of the recovery of the world economy. Since last year, BTC has retreated 70%+, and after the collapse of LUNA, the leverage level of cryptocurrency market has been preliminarily cleared. In the foreseeable future, the accelerated tightening of the Federal Reserve and the resulting asset price crisis are the necessary conditions for a larger bull market in the next round. There is no doubt that we are standing on the watershed of the times, and opportunities are waiting for the most prepared people ahead.