Hong Hao: The collapse of the U.S. semiconductor bubble will be revealed in the next 3-6 months, and gold has already broken away from the dollar to establish a new monetary system | Alpha Summit

On December 21st, at the "Alpha Summit" co-hosted by Wall Street Insights and the China Europe International Business School, Hong Hao, Chief Economist of Sire Investment Group, delivered a keynote speech titled "Outlook for 2025: Cycles and Struggles," analyzing and forecasting asset trends and market opportunities for the coming year.

Here are some highlights from the speech:

1. The year 2025 will be particularly complex, with more uncertain political factors. Global populism, whether it's Marine Le Pen in France or the Labour Party in the UK, is redefining the political structure of the entire world.

2. Volatility is progress; without volatility, there are no opportunities. Consistent expectations lead to no trades, and often consistent expectations can create a reversal effect, resulting in excessive pessimism and optimism in the market.

3. When a bubble is forming, it goes through a self-reinforcing process, making it very difficult to burst with a single poke. Moreover, timing is crucial when it comes to bursting a bubble.

4. The market uses its volatility pattern shifts to reveal significant future opportunities.

5. Each major level of volatility will see a significant market bottoming out, providing opportunities for the next stage of a major market trend. Each major market volatility is a systemic opportunity. This time, such a large pit has been dug out, and many pessimistic sentiments and negative news have already been priced in for next year.

6. The Trump rally, which started around November 5th and 6th, has basically seen all gains erased as of the day before yesterday. If the trading around Trump was not timed precisely, then this wave has been in vain.

7. The long-term inflation expectations in the U.S. have remained high since before Trump took office. This is mainly due to the three years of the pandemic, during which the total amount of broad money produced and printed in the U.S. is more than the total amount of broad money from the founding of the U.S. up to 2020.

8. The U.S. semiconductor sector has clearly shown signs of bubbling. However, when this bubble will burst will be evident in the next 3 to 6 months.

9. Gold has re-emerged as the counterpart to the U.S. dollar, forming a new monetary system independent of the dollar. In this new system, the prices of all limited supply items are continuously rising.

10. Over the past year, 50% of the total market value increase worldwide came from seven stocks. More than 50% of the S&P index's rise came from these seven stocks. So, is this market a bubble? I believe it is.

Here is the transcript of the speech:

The Situation Facing 2025 is More Complex

Thank you all for getting up so early on Saturday to listen to my brief sharing. Since you have heard a lot about risks, I would like to talk about opportunities.

This year is actually quite interesting; 2024 is a historic year. In previous predictions, I would always provide a trading range and target price for each year.

When we looked ahead to 2024 in November 2023, we said that the A-share market would be around 3,500 points and the Hong Kong stock market around 23,000 points, and both levels have been reached, so last year's prediction was accurate However, looking further ahead, we see that the factors influencing market operations are more complex than in 2024. This is not only because after Donald Trump unified the Republican Party, a "red tide" swept across the entire United States.

Across the world, we see populism, whether it's Marine Le Pen in France or the Labour Party in the UK, these populist forces are redefining the political structure of the entire world.

So this year is particularly complex, and 2025 will be especially complex, because there are more uncertain political factors. We see that Trump has not yet taken office, as he will be sworn in only in January, but he has already started to govern via Twitter.

I remember in 2016 and 2017, every morning he would post a tweet, and our sell-side analysts would start making calls, learning various political knowledge. So next year might be the same; it will be more complex.

We see that the leadership team appointed by Trump consists of hawkish figures, whether it's his Secretary of Commerce or others. Scott Basset is his Treasury Secretary, who is a relatively moderate centrist. At the same time, we see Elon Musk. Although he does not hold an official government title, he will still play a role in the so-called efficiency improvement department.

When Musk acquired Twitter, he immediately laid off half the staff. However, Twitter seems to be operating fine without many issues.

So next year will be very interesting, especially when Musk starts laying off people; he will quickly realize that improving efficiency in a government department is very difficult. Especially when you want to cut half the staff and save $2 to $3 trillion in budget annually, this is very challenging. One misstep could lead to cutting off a relative or confidant of Trump. So we will wait and see.

Major opportunities are likely in the bubble phase

The situation in China is also very interesting. During the entire turbulent pattern transition, our market will express itself through its price volatility.

Last year, we shared a chart showing the implied volatility of the U.S. market, processed through filtering and cyclical analysis. We observed that every seven to eleven years, in the mid-cycle, the entire market's implied volatility goes through a cycle from low to high and back to low.

Last year, when I showed everyone that chart, we said that the entire market is currently in a high volatility phase. A high volatility phase does not mean that the market is full of risks, because the traditional financial definition of risk is simply and crudely based on volatility.

But we all know that volatility is progress; without volatility, there are no opportunities. Consistent expectations lead to no trading, and even consistent expectations often produce a reversal effect. The market can be overly pessimistic or overly optimistic.

When we presented that chart last year, we were exactly at the peak of that wave. We said we are in a high volatility market, in a high volatility phase, which will create various opportunities, and major opportunities are likely on the right side of the fat tail, which is this bubble phase. This year, looking back, especially at AI stocks in the United States, basically, if you bought them, you could have just laid back and won this year.

At the same time, let's take a look, in the past year, 50% of the total market value increase in the world came from seven stocks. Over 50% of the rise in the S&P index came from seven stocks. So, do you think such a market is a bubble? I believe it is.

But we all know, I have repeatedly said that when a bubble is forming, it goes through a self-reinforcing process, and it is very difficult to burst it with just one poke.

Moreover, timing is very important when it comes to bursting a bubble.

Now, due to global political uncertainties and overall market volatility, I believe that in the next 3 to 6 months, we will see a significant level of adjustment. However, this is likely to be another opportunity to build positions again, as the fundamentals of the U.S. economy have not shown any particularly big problems.

On the Chinese side, in February during this year's Spring Festival, there was a wave of quantitative matrix market. We have already discussed the specific causes of this market at that time. But what we want to emphasize is that the market's volatility pattern transformation shows a significant opportunity for the future.

At that time, we observed the price fluctuations of small and micro-cap stocks, and since we have data, including all human financial history data, including the Dow Jones index over the past two to three hundred years, we have never seen such severe fluctuations.

Because this fluctuation is not just a lack of liquidity in a certain sector of the market. It is also because some traditional hedging strategies cannot operate. Therefore, the matrix we observed has a probability of occurrence that is still 10 followed by 24 zeros. In other words, it should not happen in the entire history of the Earth. But it happened.

Other markets also experienced very severe fluctuations this year. We see this chart showing the exchange rate, the Mexican peso, and the implied volatility of the U.S. market. We see that when the market experiences severe turbulence, there is only one number that rises, which is the overall market correlation. When all asset classes in the market fluctuate simultaneously, there is nowhere to escape; stocks, bonds, and commodities will all lose money.

Every major market fluctuation is a systemic opportunity

However, every major fluctuation we see is a significant market bottom-seeking process, providing an opportunity for the next stage of a major market trend.

For example, let's look at November 5, 2024, when Trump won the U.S. election, causing market fluctuations, but this time the fluctuation was clearly on the right side of the fat tail.

March 20, 2020, was when the U.S. market experienced five circuit breakers, and the Federal Reserve stepped in to rescue the market. November 3, 2016, was when Trump unexpectedly won the election for the first time.

And October 23, 2008, was when we in China were preparing to announce the 4 trillion yuan plan So you see, every major fluctuation in the market is a systemic opportunity. I believe this time is no exception; with such a big pit dug out this time, I believe that many pessimistic sentiments and negative news will be priced in by next year.

Jumping ahead, as the market stands now, if you have been following my verified Weibo account, I recently posted a chart after experiencing the recent sharp decline in the U.S. market.

This is the longest continuous decline in the Dow Jones Index since 2001. It is also the largest single-day adjustment in recent years and the worst market reaction to a Federal Reserve interest rate meeting in 20 years, with the Nasdaq dropping about 3%.

The Trump rally, which started around November 5th and 6th, has basically seen all gains wiped out as of the day before yesterday; the S&P has completely retraced. This is what is referred to as this rally. If this rally, if the trading rally under Trump was not precisely timed, then this wave has been in vain.

The Market Misunderstands the Consensus on Trump

When Trump came to power, his political agenda had several very important points. One was the relaxation of regulations on the financial sector, and the other was further promotion of the return of manufacturing. This mainly focused on the domestic situation in the U.S. So many people believe that with Trump in power, inflation expectations would rise sharply.

However, if we carefully look at market data and reverse-engineer the market's inflation expectations from the U.S. Treasury yield curve.

In fact, you will see that inflation expectations have not changed significantly, or that inflation expectations have remained high.

It has been here since 2022, the yellow line represents the long-term inflation expectations derived from the U.S. Treasury yield curve for the next five years. We see that this data shows the market's inflation expectations have not changed significantly and have remained at a high level.

The blue line represents the U.S. ten-year Treasury yield, and we see that it has also remained at a high level. It has not come down at all, and it has nothing to do with Trump.

The market consensus believes that Trump alone can change many things in the U.S. As we mentioned earlier, it is not just one person doing these things; populism in the UK, France, and figures like Musk around him are all involved in this. However, inflation expectations have remained high for the two years prior to his presidency.

Since the pandemic until now, especially during the three years of the pandemic, we have seen that the total amount of broad money produced and printed in the U.S. is more than the total amount of broad money since the founding of the U.S. up to 2020. It's quite exaggerated.

Now, the annual interest expenditure on U.S. national debt is about $1 trillion or even higher. In a new government spending plan, there is a proposal to increase the salaries of congressional members by 25% to 50% If these spending plans go through, you will see that in the coming years, U.S. government spending will rise in a straight line.

Therefore, whether such a deficit-financed budget can be sustained has always been a big question mark for us, especially after 2022.

So every time we see the entire market start to fluctuate, or when U.S. Treasury yields begin to rise, we see gold prices start to decouple from U.S. Treasury yields.

Because the U.S. dollar, as a fiat currency, is slowly being split apart by the actions of its own government.

So I think this is a misunderstanding of the market regarding Trump, and the market consensus on Trump's new policies is also a misunderstanding, meaning the market believes that one person can change the entire world order.

But the facts show that data proves otherwise; inflation expectations have not come down. And these inflation expectations are related to the entire U.S. dollar fiat currency system.

Exchange Rate is a Key Variable for Next Year

A key variable for next year is the exchange rate. We all know that after a series of important meetings on September 24, the exchange rate of the Renminbi experienced a very strong trend.

The exchange rate is a price comparison; it is especially a metric for foreign investors investing in China.

In the past few years, if we simply look at the direction of the Renminbi exchange rate and the direction of the CSI 300, you will see that they are basically consistent. If the exchange rate strengthens, our Chinese stock market will respond positively.

So why is the consistency between the Japanese stock market and the exchange rate not as strong? When the yen's exchange rate falls, the Japanese stock market rises instead?

Some say it is because Japan has rebuilt another Japan overseas in the past 20 years. But if you look at Japanese companies, the proportion of overseas earnings to the entire company's GDP is about 9% to 10%, which is not much. The U.S. is about 40% to 50%.

So more importantly, the exchange rate and the market reflect the economic fundamentals. The exchange rate, as a leveraged trade, is particularly sensitive to the operation of the fundamentals.

For example, in August, we saw a wave of yen arbitrage trading, which led to a liquidation event, right? So how the exchange rate moves next year is very crucial.

The Collapse of the U.S. Semiconductor Bubble Will Be Revealed in 3-6 Months

Let me share a chart. This is the U.S. cycle, the U.S. semiconductor cycle. If you look at the trend of the S&P 500 and the U.S. semiconductor cycle, they are starting to diverge.

We can simulate the semiconductor cycle using semiconductor shipment volumes, semiconductor company profits, and profit expectations, etc. We can see that the S&P 500's direction is clearly starting to decouple from the U.S. semiconductor cycle.

A few days ago, a very important U.S. semiconductor company, Broadcom, saw its market value increase by $320 billion in two days, equivalent to a change of over 20 trillion Renminbi. This means that in those two days, a new giant emerged in the semiconductor sector **

However, if everyone takes a look, pays attention, when the management shared the future outlook, they mentioned that by 2027, our profits are expected to increase, with AI profits projected to grow by 30%.

But we are currently at the end of 2024, and we are talking about the end of 2027, two to three years from now. So this tells you that the entire market's right tail has clearly shown signs of bubbling. But when this bubble will burst, we will see a very clear result in the next six months.

The fluctuations in imports and exports actually follow a pattern

In China, we can use various data to simulate the operation of the Chinese economic cycle. You may have also seen a book I wrote called "Forecasting."

In "Forecasting," we simulated the operation of the Chinese economic cycle through the fluctuations of the real estate cycle and the credit cycle. However, the problem is that after 2022, it became inapplicable. So we need a new indicator to simulate our cycle's operation.

We know that especially after 2020, China's strong exports supported the growth of our economy.

If we quantify the proportion of China's imports and exports in global exports, we can analyze the operation of the Chinese economic cycle. At the same time, we compare this new economic cycle indicator with the changes in our entire market and our foreign reserves. The fluctuations in China's imports and exports as a proportion of global imports and exports are very regular.

We see that the first peak appeared in 2007, which was when our A-shares reached 6,000 points. The second peak appeared around 2016-2017. The third peak appeared in 2021-2022, when China's exports reached a new high in global share.

Now we see that out of $16 trillion in Chinese exports, about $11 trillion consists of high value-added products. The exports include precision machine tools, semiconductors, heavy machinery, and so on.

The items we import from the United States include soybeans, corn, beef, and agricultural products. The subsidies that American farmers receive from the government each year are astonishing, which has led to the current structure of the economy.

So if we fit the cycle of China's exports with the operation of our A-shares, the yellow line representing exports and the blue line representing changes in our foreign reserves, we can see a correlation.

You don't need any statistical knowledge to see that the cycle of China's exports aligns with the cycle of our market operation and the changes in our foreign reserves. The changes in foreign reserves are actually a significant component of the central bank's balance sheet, and their changes are consistent. So each cycle from low to high and back to low takes about seven years.

Of course, cycles are not like a clock, but if this cycle continues to hold, then next year, our proportion of imports and exports in the world may further decline.

This year's city investment bonds outperformed the CSI 300

So where are the opportunities for next year? As we mentioned earlier, one is the continuous evolution and self-reinforcement of the fat tail right-side bubble situation.

The other is the quantitative matrix emerging in our entire market, reflecting future new structural opportunities through the transformation of its own price volatility patterns.

For friends involved in A-shares, this chart is very interesting. It shows the price changes of China's local government bonds. The blue line represents our CSI 300. We see that before 2022, both moved in tandem, reflecting the overall market's risk appetite.

Before 2022, the volatility of local government bonds sometimes exceeded that of the stock market. However, after 2022, we see that the trends of the two have completely diverged. This year's best strategy is to continuously go long on local government bonds, and your returns this year will far exceed those of the CSI 300.

We all know that local government bonds have the support of the government for debt relief. The belief behind local government bonds is still the faith in our entire country's balance sheet. So at this time, for a risk-averse investor, shouldn't you invest in an asset class backed by national credit?

Gold has detached from the dollar, establishing a new monetary system

Finally, I want to talk about gold, which I have always mentioned.

Every time the price of gold fluctuates, especially recently, we have seen that U.S. inflation has slightly exceeded expectations. Last night's PCE was good, but previously it was slightly above expectations.

At the same time, we see that the Federal Reserve has very hawkishly lowered rates by 25 basis points, leading to one of the worst market reactions to a Federal Reserve meeting in over twenty years.

So let's take a look at this chart, which compares gold with the U.S. trade deficit as a percentage of GDP and the yield on U.S. ten-year Treasury bonds. We see that the rise in the U.S. trade deficit and the yield on U.S. Treasury bonds are basically in sync. However, after 2021, we see a significant divergence between the two.

This means that in our new structure, in this new monetary credit system, gold has re-emerged as a counterpoint to the dollar, forming a new monetary system independent of the dollar.

Therefore, we see that in this new system, the prices of all limited supply items are continuously rising. The most obvious example is Bitcoin; every percentage point of dollar depreciation corresponds to about a 5 to 10 point fluctuation in Bitcoin prices, and about a 3 to 5 point fluctuation in gold prices, so this is very evident.

This represents the most significant investment opportunity in the next round of the structure, although it will also experience violent fluctuations.

Every time the price of gold drops, many readers leave comments on my Weibo asking if they should sell because gold has plummeted and can no longer be bought. Please, gold has risen from 1600 to 2800; this pattern has already formed. It has become a new system independent of the dollar system.

In November, at this time, China's central bank continued to increase its gold holdings. Meanwhile, China's holdings of U.S. Treasury bonds have fallen to less than 3% of the total scale of U.S. Treasury bonds Not only is China's central bank buying gold, but all new market central banks are also buying gold, including Russia, which is also buying gold frantically. All of this tells us that in the next stage, we may not be able to simply and crudely view things with previous thinking.

Because changes in belief take time. This change in belief has started for less than three years, just a little over two years. However, gold is the treasure of our 5,000-year human history, a pearl of the sea.

The series of divergences we are currently witnessing, such as the divergence between the US dollar and US Treasuries, the divergence between gold and US Treasuries, the divergence between the S&P 500 and the US semiconductor cycle, etc. All of these tell us that a new pattern is emerging, and significant fluctuations and large-scale opportunities are appearing. It is often during these times that we have the chance to make big profits. Thank you.