Hong Hao: Now is the time window for policies to be approved and implemented, and gold should become a part of everyone's asset allocation

1. Do not be overly obsessed with specific numbers; instead, focus on next year's fiscal planning and how to address the current economic pain points through policy in the long term.

2. The short-term fluctuations of the stock market have nothing to do with the fundamentals; a good stock market does not necessarily mean the economy is doing well, and a poor stock market does not mean the economy is in terrible shape.

3. In the next phase, every investment portfolio should include gold, a limited supply asset class, which will help mitigate many investment risks in the portfolio.

4. The rise of the dollar is due to the increase in U.S. Treasury yields, and the rise in Treasury yields is because the market's expectations regarding economic inflation pressures are changing.

The above is the latest viewpoint shared by Hong Hao, Chief Economist of Sira Group, during a recent online discussion.

In this discussion, Hong Hao reiterated that the rise and fall of the stock market do not indicate the health of the economy, emphasizing the need to distinguish between short-term fluctuations and longer-term structural issues.

According to Hong Hao, the most important structural issues currently are the bursting of the real estate bubble and the slow pace of interest rate cuts, which have led to two tightening effects.

For the market, rebuilding confidence is more important than stirring emotions; a market driven by emotions is unsustainable, while a market with confidence is healthier.

Additionally, on October 30, COMEX gold futures contracts broke through $2800 per ounce, and Hong Hao expressed his optimism about gold once again.

The latest price has since retreated to around $2755.

With various factors pushing gold prices up, Hong Hao stated that gold should be part of everyone's asset allocation.

Regarding how to profit from this trend, Hong Hao clearly pointed out that gold ETFs, RMB-denominated gold futures, and companies with gold mines can all be considered for investment.

Faced with the current situation of rising U.S. Treasury yields, a strengthening dollar, and rising gold prices, Hong Hao interpreted the fundamental reason as the market no longer believing in these so-called fiat currencies.

Key points from this discussion are as follows:

Now is the time window for policy approval and implementation

In recent years, there has indeed been a diversification phenomenon in the consumption sector, such as the rise of emerging consumption models like Pop Mart. These phenomena are not closely related to the middle-aged and elderly population but rather reflect a significant change in the consumption concepts of young people.

From another perspective, holiday travel has indeed returned to the levels of 2019 or even higher, but the average spending per customer is decreasing, with many places spending money to attract customers.

Therefore, it is not surprising that consumption exhibits various phenomena. After all, in China's economy of 130 trillion yuan, there are different consumer groups and urban clusters at different levels.

This year, I have a very clear feeling that consumption in cities below the third tier in China is very strong.

After the pandemic, especially following the downturn in real estate, many migrant workers returned to their hometowns after finding no jobs.

Upon returning home, these individuals discovered that the prices in their hometowns were very low; whether buying a house or food, everything was significantly cheaper than in the cities, so everyone is consuming in their hometowns, although the average spending per customer in these cities is relatively low In first-tier cities, white-collar workers, foreign enterprise employees, and expatriates are the main consumers, with one person able to match the consumption of several (third and fourth-tier city) individuals.

Therefore, if they do not consume, or even downgrade their consumption, the impact on macro data is significant.

If our economy were very strong, there would be no need for incremental policies.

The reason for implementing a series of incremental policies is that the operational resistance faced by the current economy is much greater than expected.

On the other hand, from January to August this year, China's fiscal expenditure has been slowing down, especially after the second quarter, with economic data not looking particularly good.

Thus, in the second half of the year, some related policies have gradually been introduced.

I remember in July, the central bank began advising people not to buy government bonds, but at that time, no one listened, so government bond yields continued to hit historic lows.

Looking back now, the reason the central bank was so earnestly advising against it was that they had already begun researching the introduction of policies.

With such a large-scale policy rollout, if everyone is heavily invested in long-term government bonds, it could easily lead to problems.

In January and February 2023, there were instances of wealth management products breaking the net value, with some wealth management fund net values dropping to 0.8 or even lower, which is very dangerous.

So, looking back, the research on policies had already begun in July, and now is the time window for these policies to be approved and implemented.

Rebuilding Confidence Takes Time

The rise and fall of the stock market do not signify much.

Short-term fluctuations in the stock market have no relation to the fundamentals; a good stock market does not necessarily mean the economy is doing well, and a poor stock market does not mean the economy is in dire straits.

This is something everyone needs to distinguish.

In the short term, it is quite simple to make the market rise.

From mid-2014 to June 2015, when the index was at 5000 points, you would see a very obvious divergence between the stock market trend and the fundamentals.

This was the most severe divergence between China's fundamentals and stock prices that I have observed in the data.

Thus, it was a bubble; the definition of a bubble is that stock prices are far removed from the fundamentals, leading to valuations soaring to an unsustainable level, while the fundamentals cannot keep up, resulting in the bubble bursting.

This was the situation in 2015.

People need to distinguish between short-term fluctuations and longer-term structural issues, which are still relatively clear at present.

On one hand, the speed of interest rate cuts in monetary policy is too slow, previously being a gradual squeeze of 10 basis points at a time.

China's real interest rates are among the highest in major countries globally, indicating that financial conditions are tightening.

On the other hand, the bursting of the real estate bubble.

Houses are not selling, prices are falling, with annual sales dropping from a peak of 18 trillion to possibly 7 trillion this year, a decline of about 60%. In many cities, second-hand housing prices have dropped by 50-60%, which is quite common.

However, official data focuses on new first-hand homes, which are influenced by price guidance.

We do not want housing prices to drop too quickly; if they fall too fast, it will directly harm the banks' balance sheets, leading to a weakened lending capacity, which is unacceptable If real estate developers cannot sell houses, local governments will see a sharp decline in land sale revenue, and without income, they will have no way to spend money.

This creates two tightening effects:

First, the tightening effect of monetary policy, where the pace of interest rate cuts is too slow, resulting in very high real interest rates in China.

Second, fiscal tightening, as local governments are unable to generate revenue from land sales.

The current policy needs to address not the "trillions" that are being circulated in small essays, as these figures are fabricated and can easily lead to various misunderstandings.

For example, many people do not understand the meaning of special government bonds and the implications of planned fiscal expenditures, so they add up various numbers, but there are many instances of double counting in between, leading to many misunderstandings.

In the end, policies will definitely be implemented according to plan, and when the actual numbers come out, they will be said to not meet expectations, leaving the market feeling disappointed.

This is also a reason for the recent high volatility in the market.

Therefore, do not be overly obsessed with the specific numbers that come out; it is more important to look at next year's fiscal planning and how to resolve the current economic pain points through policy in the long term.

Once these issues are addressed, we can then carry out long-term structural reforms, such as improving people's livelihoods, enhancing social security, reforming the retirement system, and reforming the household registration system, among others.

If these issues can receive attention and discussion, and there is a plan with a path to resolution, I believe the market will be healthier.

Simply stating how much money will be allocated to buy stocks can easily drive the market up, but this is merely a change in sentiment.

Emotion and confidence are not the same; confidence is about having faith in the long-term outlook and expectations for future living conditions.

Regardless of whether I am happy or not today, because I have a relatively positive vision for the future, I will not sell my stocks due to today's emotional fluctuations.

This is why we mentioned earlier that stock price fluctuations have nothing to do with fundamentals; they are purely a reflection of human emotions.

These are things we need to pay attention to whether we are trading or planning future expectations.

Moreover, the time required to rebuild confidence is much longer than the time for emotional fluctuations.

For example, for real estate sales to rebound, we must see improvements in employment conditions, expectations for future wage growth, improvements in social welfare, and so on.

It is not simply a matter of feeling good today and rushing to buy a property; I believe very few people can do that.

Therefore, rebuilding confidence takes time, which is something everyone needs to pay special attention to when investing.

If it is merely a change in sentiment, like the last week of September and the first week of October, it can easily lead to a market surge, but the sustainability is not particularly strong.

Gold Should Be Part of Everyone's Asset Allocation

We once said that gold (still has room to rise), and at that time, no one believed it, and even now, not many people truly believe it.

I just checked, and today (October 30) it has reached 2800 (COMEX gold futures contracts broke through $2800 per ounce during trading), marking another historic high.

It is clear that the questioning of modern fiat currencies, the questioning of the dollar's status as a reserve currency, the volatility expectations caused by policy choices after the new president takes office, and the continuous increase in gold holdings by central banks around the world are all driving gold prices higher At the same time, these asset classes with limited supply have seen a significant price increase.

Among all asset classes this year, the best performer is Bitcoin, which continues to hit new highs; the second is gold; and the third is silver, which may outperform gold by the end of the year.

Warren Buffett said that gold is a relic of the barbaric era.

Due to the gold standard, gold served as an anchor for monetary policy, leading to a monetary growth rate that lagged behind economic development, resulting in deflationary pressures in society.

Therefore, when the U.S. abandoned the gold standard, it also lifted restrictions on capital flows, allowing global capital to remain in or exit the U.S. capital markets, which was a revolutionary change.

However, in today's world, with a lack of credit and a global economic slowdown, the speed of money issuance far exceeds the rate of economic growth, naturally leading to inflation.

This is also why we have always believed that inflation will last longer than expected.

So how can we make money in this trend?

By buying all related assets.

Every time I write on Weibo: the gold market is far from over, the long-term trend is still rising, and there will be historic opportunities.

There will always be someone saying that retail gold prices have not risen.

But retail gold is not gold; I am not suggesting you buy gold jewelry stocks, which only earn processing fees.

Therefore, the focus should be on companies that own gold mines, gold ETFs, gold futures, especially RMB gold futures, as well as physical gold, various gold stocks listed in the U.S., and small gold mining companies, all of which have performed very well, and their increases are consistent with gold.

Gold should be a part of everyone's asset allocation, especially for Chinese families.

Currently, over 70% of Chinese household assets are in real estate, with the remainder in bank wealth management products, etc.

The stock market is around 60 to 70 trillion, accounting for less than 10% of personal household asset allocation, while the real estate market, before its decline, was around 50 to 60 trillion, making it the largest asset class in the world.

I have rarely seen anyone allocate stocks in the A-share market because A-shares are always being traded.

What we refer to as allocation is over a period of 3 years, 5 years, or even longer, allowing it to occupy a certain proportion in your investment portfolio.

It can not only achieve the highest expected returns but also reduce the investment risk of the portfolio, which is the effect we want to achieve.

Therefore, I believe many people still perceive gold as a trading asset, just like trading stocks.

This is why people buy a little gold or a little Bei Zheng with one or two points; this is a speculative position, not an allocation position.

Of course, everyone has different investment styles; some prefer intangible assets, while others like tangible assets like real estate, etc.

However, in the next phase, everyone’s investment portfolio should include gold as an asset class with limited supply, which will help mitigate many investment risks in the portfolio.

The market no longer believes in these so-called fiat currencies

When U.S. Treasury yields rise and the dollar strengthens, gold also strengthens, which is rare in history.

This is because gold is priced in dollars, making it difficult to see both the dollar and gold rise simultaneously.

The dollar rises because Treasury yields are increasing, and Treasury yields are rising due to changing market expectations regarding economic inflation pressures.

Regardless of which president takes office, the fiscal deficit will expand; it's just a matter of comparing who is more irresponsible, cost-ignoring, consequence-disregarding, and reckless.

Therefore, the U.S. fiscal deficit will be very large, currently around 6%, with the possibility of returning to 7% or even higher.

With such a high fiscal deficit, how will they refinance several trillion dollars of Treasury bonds to fill the U.S. gap, and at what price will they issue them?

If they issue at 4% or 5% interest, how high will the annual interest repayment cost be? It's unimaginable.

Fundamentally, the market no longer believes in these so-called fiat currencies.

So, what we see now is that the dollar is appreciating because Treasury yields are rising, while other currencies are depreciating.

For example, after the yuan reached 7, it quickly depreciated back to around 7.14 or 7.15.

Meanwhile, Japan's political scene has encountered a situation unfavorable to the ruling party, unable to form a government that can make its own decisions.

At this time, the market has concerns about the future of the yen.

I believe that after the historical shock in August, the Bank of Japan will also be cautious.

If they need to raise interest rates to combat inflation, they must consider the impact on Japan, Japanese bonds, and the Japanese stock market, as well as the effects on global financial markets.

For instance, a few days ago, Japan and China’s central banks signed a yuan swap agreement to supplement their liquidity, as China is also a significant counterparty for Japan's foreign exchange.

This all tells us that the yen's weakness is partly due to the uncertainty surrounding Japan's political situation and economic outlook;

On the other hand, everyone knows that the Bank of Japan might just be a "wolf is coming" story, constantly saying they will raise interest rates but actually unable to do so.

Moreover, if the yen appreciates, Japan's inflation pressure will decrease because Japan's inflation is imported.

If the yen depreciates, it is very beneficial for Japanese exports, but it does not bring much benefit to their own people