Global Collapse: Causes Uncovered
A soul-searching question from Buffett: Do you still have cash on hand?
Caught off guard, today's global stock markets have collectively collapsed.
The Nikkei 225 index fell by over 4,400 points, a drop of more than 12%, setting a record for the largest single-day decline, surpassing the record set on Black Monday in October 1987. In just a few trading days, all the gains made so far this year have been wiped out.
South Korea's main stock index also plummeted, with the Kospi falling by more than 8%, breaking through the 2,500 point threshold, and triggering circuit breakers on multiple indices. The Kosdaq index, dubbed "Korean Nasdaq," fell by more than 10%.
Taiwan's stock exchange's weighted stock price index closed down by more than 8%, setting a record for the largest single-day drop in history.
European stock markets also suffered panic-induced heavy losses, with the German DAX index falling by 2.5%, the French CAC 40 index by 1.29%, the British FTSE 100 index by 1.75%, and the Euro Stoxx 50 index by 2.76%.
The New Zealand stock market joined the global plunge, with the NZX-50 index closing down by 1.5%, marking the largest drop in 18 months.
U.S. stock index futures also declined collectively, with the Nasdaq 100 index futures falling by more than 5% during the session, and the S&P 500 index futures by more than 3%.
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In comparison, although the A-shares also fell, this level of decline is actually the strongest in the context of the global collapse.
Of course, it can also be understood that A-shares had fallen too severely before and now they are somewhat resistant to further declines.As for the reasons for the decline, it's quite simple:
Firstly, the risk of a recession in the U.S. economy has intensified.
Last Friday, the U.S. released non-farm data that was significantly below expectations, with the unemployment rate soaring to 4.3%. The market generally believes that the Federal Reserve's ultra-long cycle of high interest rates has completely devastated the U.S. economy.
If the U.S. economy is not doing well, it naturally drags down the global economy. Moreover, it could be another major global economic recession. As a result, global asset trading must inevitably enter a recessionary trading mode.
Regarding this point, it fully demonstrates the suspicion of U.S. economic data fabrication and collusion with political purposes.
Before Biden withdrew from the race, in order to secure his votes, he demanded that the Federal Reserve's interest rate hikes be placed before the establishment of the new U.S. government to garner votes for himself. At this time, the signals released by the U.S. were all about good economic data, prosperity, and absolutely no possibility of a recession.
Now that Biden has withdrawn from the race, on the one hand, there is less pressure from the Biden administration, and on the other hand, Trump is likely to take office, demanding a rate cut before the election. Overnight, this directly turned into the U.S. economy being all sorts of not doing well, and even the previously tight labor market is also unbearable. The latest U.S. non-farm data is only 114,000 people, significantly lower than the expected 175,000 people, and that's not enough, even revising the previous value from 206,000 people to 179,000 people.
Is this not fabrication? What is it then? This is the crazed manipulation of the market.
Secondly, Japan's interest rate hike triggered a collapse in the Japanese stock market, thereby exacerbating the risk fluctuations of global assets.
At the end of the monetary policy meeting on July 31, the Bank of Japan decided to raise the policy interest rate from 0% to 0.1% to 0.25%. This is the first interest rate hike since the Bank of Japan ended its negative interest rate policy in March of this year.This year, the Japanese stock market has performed exceptionally well. The depreciation of the yen, on one hand, has promoted the development of Japan's tourism industry, and low interest rates have also stimulated economic activities; coupled with the fact that many Japanese companies are engaged in multinational businesses, this has made the profits of Japanese companies listed on the Tokyo Stock Exchange look very impressive on paper.
After the yen's interest rate hike, all the aforementioned benefits disappeared. In addition, the recession in the U.S. economy has dragged down Japan, which is export-oriented and dependent on the world's largest economy, triggering market concerns about a recession in the Japanese economy.
This has led to a collapse in the Japanese stock market, which in turn has dragged down the global stock market.
Third, Warren Buffett's butterfly effect.
Neither too early nor too late, last weekend Buffett announced his intention to "abandon" Apple, causing a shock in the global market. Amid the discourse of a U.S. economic recession, weak economic data, panic among retail investors, and increased expectations for a Federal Reserve rate cut in September, the "butterfly effect" has directly triggered a financial hurricane in Japan across the ocean, exacerbating the volatility of global assets.
I really admire the old man's level of macroeconomic research, and of course, his political acumen.
In previous articles, I have repeatedly reminded everyone to learn from history. After the Bank of Japan's interest rate hike, it's not far off before the global market suffers.
The yen's interest rate hike has a significant impact on the global capital market:
Firstly, the yen still has a certain influence globally and is one of the important currencies in the foreign exchange reserves of many countries; it has always been the world's fourth-largest payment currency until it was surpassed by the Chinese yuan in 2023. Therefore, when the yen appreciates, carry trade funds will flow to Japan. The total amount of global funds is limited, so when more flows to Japan, less will flow to other countries.
Here, we are the first to be affected, being right next door. Of course, given China's large size and already low interest rates, there isn't much carry trade capital, so it does have an impact on us, but not as much as everyone might imagine.Secondly, the yen interest rate hike will have a certain impact on US Treasuries. Previously, the yen depreciated significantly against the US dollar, and with the US dollar in a continuous interest rate hiking cycle, a large amount of carry trade capital left Japan to purchase US Treasury assets. We observe that Japan is the country that buys the most US Treasuries, with the current scale reaching 1.13 trillion US dollars.
After Japan raises interest rates, money will flow back to Japan due to the narrowing of the arbitrage space, so there will definitely be a situation of selling US Treasuries. However, the scale of Japan's holdings of US Treasuries accounts for a relatively small proportion of the entire US Treasury market, around 3%. Moreover, it is impossible for Japan to sell all of them, so there will be no possibility of a US Treasury collapse and economic crisis.
Thirdly, we should be vigilant about the economic cycle crisis at the timing of Japan's interest rate hike. Historical records show that shortly after the Bank of Japan raises interest rates, the world often encounters unfortunate events, and even enters a textbook-level global financial storm.
In the 1980s, to curb the overheating of the bubble economy and control the growing inflation, Japan began to raise interest rates. Subsequently, the US economy entered a stagflation phase, and the Latin American economy entered the "lost decade."
In 2000, the Bank of Japan ended the zero interest rate and raised the interest rate back to 0.25%! At that time, the risk of the internet bubble still seemed controllable. However, the bad news was that just two weeks after the Bank of Japan raised interest rates, the internet bubble burst, and the Nasdaq index began a more than two-year decline.
A few years later, in 2007, Japan raised interest rates twice, and just a few months after the second rate hike, the US subprime mortgage crisis erupted, triggering a global financial crisis.
Although Japan's interest rate hike will not directly trigger a global financial crisis, when the Bank of Japan finally decides to turn its monetary policy, it is often at the bottom of the global economic cycle, which is the most difficult time for the global economy, and when other markets are most likely to encounter serious problems.
In a global market crash, the most uncomfortable are investors with full positions in equity assets. Mr. Buffett is really amazing, he has been cashing out, reducing his holdings in Apple by more than 50%, and now he has nearly 300 billion US dollars in cash.
So sometimes we can't be too dogmatic when learning from Buffett, we must not only listen to his words but also observe his actions. Four years ago, Buffett took advantage of the pandemic to buy a large amount of Japanese stocks. This year, he spent a lot of money to tell the world about the profit effect of the Japanese stock market, but then he left himself.
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