• Article
• 2024-08-08

Fed Cuts Rates: What Should We Do?

The Federal Reserve recently announced a rate cut of 50 basis points and emphasized in its statement its commitment to balancing the two primary goals of "controlling inflation" and "promoting employment."

Global markets have generally responded positively, while domestic stock and real estate markets remain sluggish.

There is widespread concern about the profound impact of the Federal Reserve's new measures on global markets and the Chinese market.

People also hope to understand how to allocate assets in the coming period to better achieve the goal of asset preservation and appreciation.

Some are worried that the rate cut may signal a slowdown in the U.S. economy, which could trigger global economic growth concerns and lead to market volatility.

I do not agree with this view.

First, although the 50 basis point rate cut is slightly larger than I initially expected, on the whole, global stock, foreign exchange, and bond markets have reacted positively after the Federal Reserve announced its interest rate decision.

I believe this is due to the Federal Reserve's full disclosure of its decision-making direction and action standards to the market in advance, allowing all parties to fully digest the impact of this rate cut.

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In fact, a 50 basis point rate cut is likely to have a further positive impact on global stock markets.

As the United States is the world's largest economy with significant influence on the global economy, the Federal Reserve's rate cut measures will reassure global investors that the U.S. economy will maintain steady growth with the support of moderately loose monetary policy.

This move will boost the confidence of global investors and promote stock market gains.

Secondly, if the Federal Reserve continues to cut rates, it is highly likely to lead to a weakening of the U.S. dollar.

As the risk-free return on the dollar decreases, it usually diminishes the attractiveness of the dollar, and other major global currencies such as the yen, euro, and pound are likely to strengthen in the coming period.

In addition, rate cuts may affect global capital flows.

As U.S. interest rates decline, the attractiveness of U.S. securities may decrease, and some investors may seek higher-yield investment opportunities, which could lead to capital inflows into other countries and markets.

Therefore, the long-term investment returns of U.S. bonds and stocks may not perform as well during the dollar's rate cut cycle as they did in the previous period, and this possibility is not small.

In summary, the Federal Reserve's 50 basis point rate cut generally has a positive impact on the global economy, global stock markets, and even the bond market.

So, how does the Federal Reserve's rate cut affect our domestic real estate and stock markets?

How should macroeconomic policy respond?

The conclusion is clear: we have long been in a "debt storm," and between the macroeconomic policy orientation of "face-saving" and "substance-seeking," we should resolutely choose "substance-seeking"!

I have always called for decisive measures to be taken to underpin the economy with strong monetary and fiscal policies "heavily and quickly," such as rapidly cutting interest rates to zero to reduce the debt costs of society and residents, and issuing a sufficient amount of cash consumption vouchers to residents to stimulate consumption... Next, let's focus on how individuals should respond to the new situation in terms of asset allocation strategy: First, for domestic asset allocation, we should understand that individual power is insignificant in the face of the big cycle.

Only by adapting to the cycle and making timely and appropriate responses in the allocation of major asset classes can we survive the cold winter of the down cycle and welcome the next spring when everything revives.

The current correct strategy is to reduce and underweight domestic real estate with poor liquidity as much as possible, maintain sufficient cash, and gradually allocate to carefully selected high-quality domestic listed company stocks at a reasonable low price.

We need to focus on the research of the profitability of listed companies.

Because in the future, both macro and industry will face significant challenges, and companies will face various difficulties.

Only a few excellent companies can successfully go through the cycle.

We need to pay special attention to the long-term continuous cash dividend ability of listed companies.

If a listed company can insist on long-term continuous and substantial cash dividends, it can prove that the company has been making real money rather than paper profits.

Whether a listed company can make money and cash dividends also directly determines whether investors can obtain reasonable returns.

As long as the listed companies in which investors hold shares continue to make profits and pay cash dividends, even if the bull market never comes, shareholders can also recover their investment costs slowly through dividend returns.

I believe this is also the way of success for the Qing Dynasty celebrity Zeng Guofan, who relied on "building a solid camp and fighting a dull battle."

Why not strive more actively to fight for a chance of survival?

Because investment and financial management are different from working and entrepreneurship.

The former aims to achieve a small success with a high probability, relying on continuous accumulation of small victories to achieve a big goal.

On the contrary, it will be farther and farther away from the goal.

A data analysis report on gambling probabilities by The Wall Street Journal reveals such information: among the top 10% of people with the largest bets on a large online gambling website in Asia, 95% end up losing money, a probability higher than the 90% mentioned in the saying.

There is a common game in the "entertainment venue" called "buying big or small."

The dealer shakes a cup containing three dice and then guesses whether it is big or small.

After opening the cup, if the sum of the three dice is less than or equal to 10, it is considered "small," and the bet on "small" pays 1 to 1; if the sum of the three dice is greater than or equal to 11, it is considered "big," and the bet on "big" pays 1 to 1.

However, if the three dice have the same number, it is called "surrounding dice," and the dealer wins, which means no matter whether you bet big or small, you lose.

According to our method just now, it can be calculated that the probability of winning by betting big or small is 48.61%, and the casino advantage is 2.78%.

Some people try to increase their chances of winning by different methods.

The usual method is: if the first round opens "big," the probability of "small" in the second round will increase.

If the first two rounds open "big," the probability of "small" in the third round is even higher.

Therefore, he just needs to wait and observe.

When he finds that several "big" have been opened consecutively, he bets on "small," or when several "small" have been opened consecutively, he bets on "big," thinking that this method has a higher probability of guessing correctly.

The casino side also shows the past dozens of rounds of "big" or "small" to the players, seemingly helping the players to find the law to defeat themselves.

In fact, this is a very common wrong idea, because: rolling dice is an independent random event, and the result of the first roll has no connection with the second, so if you don't count "surrounding dice," the probability of opening "big" and "small" the second time is still 50%; if the first two times open "big," the probability of opening "big" and "small" the third time is also 50%.

In reality, the continuous opening of "big" for more than ten times in a row often appears in the gambling game, and such a "long dragon" will often make some people lose their homes.

Probability theory tells us that the number of times "big" and "small" are opened is close to equal.

But there is an important premise: large numbers.

That is to say: only when the number of dice rolls is sufficient, this law is established.

If you don't count the surrounding dice, if you roll the dice 1 million times, there will be close to 500,000 times of big and 500,000 times of small.

But who has the time and energy to play 1 million games?

Moreover, even if the game has been played 1 million times, the probability of rolling the dice for the 1 million and 1st time is still 50% for big and small.

The continuous surrounding dice in this process makes players "accumulate small losses into big losses."

Back to the asset allocation of investment and financial management, it is still necessary to adhere to the basic principle of "building a solid camp and fighting a dull battle," and refuse to participate in various games where they are at a disadvantage in probability.

Secondly, it is to use all legal channels and tools that can be used (such as QDII funds, etc.)

to allocate overseas stocks and fixed income assets to achieve diversified asset allocation in investment regions, for example, the United States, Japan and other economies are still in the stage of global capital inflow, and the inflow of funds and capital is conducive to local economic growth, conducive to the operation of local enterprises, and also makes local consumption more vigorous.

The Federal Reserve's rate cut releases more liquidity, which is conducive to the continuation of this trend.

Investors allocating these assets have a higher probability of winning at this stage.

In summary, the current domestic and global major economies are in different stages of the economic cycle.

Domestic investors should adopt a "defensive inside and offensive outside" strategy in the allocation of investment and financial assets, which is more conducive to seizing different global investment opportunities to increase the probability of winning and achieving the goal of wealth preservation and appreciation.