Hong Hao: In the next 3-6 months, the US stock market will see a correction of over 10%, and the spring offensive of the A-shares will depend on how policies are implemented

On January 15th, Hong Hao, Chief Economist of Siree Group, expressed his views on the spring offensive of U.S. stocks and A-shares in the Hong Hao Strategy column.

The investment workbook representative summarized the key points as follows:

1. Developed markets around the world are selling government bonds, mainly because inflation expectations have risen rather than fallen.

In the context of strong inflation expectations, it is difficult to see any performance in the bond market. Only the Chinese bond market continues to reach new highs in price and new lows in yield, mainly because domestic inflation expectations are extremely weak, or even nonexistent.

1. In the next phase, we will see (U.S.) inflation levels possibly rise due to factors such as the U.S. restructuring the global supply chain, trade wars, and an aging population.

Inflation may rise from a low level of 2% to 4%. This will be a whole new economic model.

1. In the short term, U.S. Treasuries are in an oversold state.

2. In the next 3-6 months, we will also see a relatively decent adjustment in (U.S. stocks), which is without a doubt.

As for how large the adjustment will be? In fact, if you observe U.S. stocks closely every year, there is usually a wave of around 10% adjustment, and I believe this wave will be a bit larger.

1. The so-called spring offensive of (A-shares) will depend on how our policies are implemented.

Below is the essence compiled by the investment workbook representative (WeChat ID: touzizuoyeben) to share with everyone:

Why are global developed markets selling government bonds while China's bond market prices continue to reach new highs?

Developed markets around the world are selling government bonds, mainly because inflation expectations have risen rather than fallen, especially with the heating up of the job market. The situation in the UK is special, as fiscal issues are fermenting; in 2022, the UK pension funds faced a sudden collapse in bond purchases, and the UK government bond market was on the verge of collapse, prompting the Bank of England to intervene in bond purchases.

Overall, in the context of strong inflation expectations, it is difficult to see any performance in the bond market. Only the Chinese bond market continues to reach new highs in price and new lows in yield, mainly because domestic inflation expectations are extremely weak, or even nonexistent.

Recently, a chart has become very popular, showing that the yield on China's ten-year government bonds is rapidly declining, resembling the trend of Japanese government bond yields in the 1990s.

At that time, the Japanese bubble burst, and pessimistic sentiment spread. After the bubble burst, various problems began to emerge, such as issues related to population, economic growth, asset prices, and the yen exchange rate.

Therefore, for a period of time, the current trend of China's ten-year government bond yield is very consistent with the trend of Japan in the 1990s, which makes these charts quite alarming.

However, we have different historical periods for comparison; while price trends can be compared, the historical contexts that produced these price trends may not be entirely consistent.

U.S. inflation levels will rise again: from 2% to 4%

In a high-interest-rate environment, the government needs to refinance. During Yellen's term, she borrowed a large amount of two-year Treasury bonds, opting for short-term bonds instead of ten-year bonds, possibly anticipating that inflation would decline rapidly, leading to a quick drop in two-year Treasury yields and thus reducing refinancing costs. When the two-year Treasury bonds mature, the government's refinancing costs will decrease.

However, the current yield on ten-year Treasury bonds is close to around 5%, while the yield on two-year Treasury bonds is around 4.4%-4.5%.

So Yellen may be timing the market, thinking that inflation will disappear in two years, which is clearly incorrect.

Those who understand history can look at the inflation caused by the two oil crises in the 1970s, the 1973 oil crisis, and the oil crisis around 1978, which resulted in two peaks of inflation. Our previous view is that this round of inflation will last longer and be higher.

In the next phase, we may see inflation levels rise again due to factors such as the U.S. restructuring global supply chains, trade wars, and an aging population. Of course, the impact of AI remains uncertain.

However, the situations we are currently observing will elevate inflation levels. If this is the case, Americans who have been accustomed to 0% to 2% inflation may find that 2% inflation is considered low, and in the future, 4% inflation will be seen as low inflation.

These are two completely different models that require different fiscal management approaches.

However, it is clear that the U.S. will face significant refinancing pressure next year, as the pressure to refinance is very high. Who made Yellen borrow so many two-year Treasury bonds? Whether she can reduce the fiscal deficit through Musk's streamlining remains to be seen, so we will wait and see.

Inflation may rise from a low level of 2% to 4%. This will be a brand new economic model that requires different fiscal management methods. The U.S. may face refinancing pressure next year, and whether it can reduce the fiscal deficit through policy adjustments remains to be seen.

In the next 3-6 months, U.S. stocks may see a correction of over 10%

But in the short term, U.S. Treasuries are in an oversold state. Regardless of the various technical indicators and the outflow of funds, I have seen the largest consecutive two-month outflow of funds. At the same time, market sentiment in the bond market is very pessimistic, with everyone believing that inflation will not come down.

Generally speaking, such oversold sentiment should lead to a technical rebound in the short term, which will transmit pressure from the bond market to the stock market. Because a high-yield bond market is very unfavorable for high-growth stocks, it will help the U.S. stock market have a trading rebound buffer.

Because there has been a significant drop recently, Tesla fell by one-third from its peak to its lowest point, which will help the U.S. stock market have a technical repair in the short term.

The adjustment in U.S. stocks may be a prophecy for the future. Because reaching a peak, even if it is a temporary peak, is a process, not something that happens in a day. Therefore, in the next 3-6 months, we will also see a relatively decent adjustment, which is without a doubt. As for how large the adjustment will be? In fact, if you carefully observe the U.S. stock market every year, there is usually a wave of adjustment around 10%, and I believe this wave will be a bit larger.

Because in this wave, we see various indicators diverging, concentrated positions, exaggerated valuations, etc., this adjustment will far exceed 10%.

The Spring Offensive of A-shares Depends on How Policies Are Implemented

The legendary spring offensive of A-shares depends on how our policies are implemented.

We are waiting for Trump's tariffs, and we are watching what kind of tricks he has up his sleeve since taking office. Trump has shifted his attention to Greenland, Canada, and Mexico, which were once allies, making it very puzzling, so no one knows what he is really up to.

Greenland has a relatively large amount of rare earth reserves, and it also has a significant amount of graphene reserves, so it is understandable why Trump wants this territory, as the largest rare earth production currently comes from China.

If you are in the semiconductor industry, it is impossible to do without rare earths. If China cuts off your supply, you are finished, which is understandable.

Many people do not know that Canada and Mexico are actually the first and second largest trading partners of the United States, while China is the third largest trading partner. So how will this trade war be fought?

It means you are going hard on your three major trading partners, which is very puzzling. However, his unpredictability is his negotiating advantage. We will see how he acts once in office, but the spring offensive still depends on how our policies are implemented.

Source: Investment Workbook Pro Author: Class Representative

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