Random Thoughts #1 — Cycles
When I was growing up in Beijing, I got sick quite often, not anything serious but enough to make me unhappy and my parents worry, like stomach flu or throat inflammation and I would go to hospitals for IV drip. Those IV drip treatments (sometimes with antibiotics, just to be safe) were quite effective and I was quick to recover. It was the easiest solution for me and my parents because it was always effective, efficient and cheap. Fast forward many years when I moved to Hong Kong for university and later exchanged in the Netherlands, I gradually realised that IV treatments are considered as a minor operation and not recommended for patients with less serious aliments. Doctors more frequently recommend several days of rest, hydration and enough nutrients for recovery.
The Federal Reserve, in the latest outlook report, expects no rate hikes in 2019 and only 1 hike in 2020 and the balance sheet unwind is likely to take a stop too. The capital market is apparently pricing in at least one rate cut in 2020. The already dovish tone of the Feb turned into an even milder one. Trump’s relentless complains and calls to Powell seem to have worked. After all, who would really go against the boss who gave you the job, for the sake of some loosely defined independence? Of course, to uphold the image of independence, there have to be valid reasons, such as economic slowdown, weaker consumer spending and confidence, and external uncertainties. There is no doubt that the economic growth is slowing, especially after the robust growth boosted by major tax cuts in 2018. A slowdown is the only natural thing post a sprint helped by extra energy drinks.
The truth is that everything follows cycles, Earth, seasons, human bodies, and the economy. In every cycle, there will be ups and downs. And the wishful thinking that there is some miracle potion to keep the uptrend endless is destined to failure. The up and down are like the Yang and Yin, and they complete and support each other. I cannot delay the annoyingly humid and hot summer of Hong Kong forever so that the pleasant breeze of spring stays. I can only shorten my sleep to 5 hours before I lose my focus and go coconuts. Economic expansion and contraction are the same and everyone accepted it before major central banks started to act as superheroes to save all. Of course, when it is major crisis like 1997 or 2008, it makes sense to minimise the damage. This, however, does not imply that whenever the economy gets a bit under the weather, super-antibiotics (cheap money) should be the solution. It is a short-term fix, at the expense of long-term growth. Financial crisis will come, one way or another and it will hit us in the most unexpected way as it always does. I think we should save the super-drugs till then.
In Chinese medicine, there is a saying called “固本培元”, meaning building a solid foundation (both mentally and physically) is key to one’s health. After realising IV drip and antibiotics are neither really effective nor cheap with unquantifiable costs in the future, I turned my focus on building my inter strength by following a low-carb diet, and practicing meditation and Tai Chi. Those changes would take months, if not years, to build one’s inter strength. So they are definitely not short-term fixes. They are, on the contrary, long-term investments with compounding interests. Maybe central banks should learn some Chinese medicine principals.
If we are really entering another quantitative easing cycle and I think we are, assets with real yields, including real estates, should see another (rapid) capital appreciation cycle. This is on top of the already expensive valuations across all major asset classes. The income and wealth gap between people with assets and without assets, no matter wealthy vs poor or older generation vs younger generation, is only getting greater. This will inevitably lead to more social inequality and unrest, as we have seen so far, but at a larger scale. What would be the solution then, when cheap money cannot get cheaper and everyone is hooked on this miracle drug called quantitative easing?
