Many people have a misunderstanding of the market, that is, a misunderstanding of the capital aspect, and think that the market is completely driven by funds. This thinking is not entirely objective. On the whole, funds determine the short-term, while fundamentals determine the long-term. The resonance of the two is the best environment.
First, through the impact of funds on the real economy, the corresponding expectation of changes in the fundamental variables of the variety will be generated, and this expectation will act on the price of the variety. That is to say, the entry of capital into the market to drive changes in product prices is due to changes in expectations on fundamentals , not that the price changes of various products are entirely driven by funds (examples will be given later).
Take the central bank's rate cut as an example. The central bank's rate cut will release funds into the national economic cycle, which will improve economic demand and supply, improve economic data, and at the same time improve the efficiency and direction of funds, improve bond yields, and improve both Spreads on Treasury bonds. This is the principle or path of exchange rate changes.
Therefore, changes in product prices are not entirely driven by funds, not funds coming in for speculation, but changes in fundamentals, which are fund-guided behaviors generated by fundamental expectations.
Changes in market prices will not be guided by funds first, and then by fundamentals. Some people think that there is capital hype in the market, but in most cases this is not the case. The market is based on the expectations generated by the changes in the fundamental variables of each variety, and then funds fuel the flames and drive the market.
First of all, it must be based on fundamentals. Fundamentals are a necessary condition. Without the support of fundamentals, more funds will not support price changes for a long time. Possibly in the short term, but not in the long term.
If there is no fundamentals, only funds, from the perspective of long-term investment allocation, cannot be done. That is to say, the long-term trend and investment income must be based on fundamentals (do you want to spend money on prices all the time? How much money does this have to have).
For example: in the real estate market, the supply and demand for houses is the fundamental. If the supply of houses is always greater than demand, no matter how much money there is, house prices will not rise. Therefore, for real estate, the relationship between supply and demand is the basis. Only on this basis can optimistic expectations be generated, and then funds can come in to further push prices (for example, currency pairs are not very good. For real estate, it is simple and easy to understand).
Funds can only play a role in expanding or shrinking expectations under the condition of fundamental support, but funds themselves cannot determine the price of a product for a long time.
When the market's expectations of the fundamentals are overheated, the market will generate speculation. At this time, the market is completely driven by funds.
This kind of market is characterized by intense and short-lived. When the fundamentals are corrected, the price will quickly move closer to the fundamentals. At this time, we will see large fluctuations in the price of varieties, which seem to rise sharply or fall sharply. This is a market driven by funds, which is intense and short-lived, and there are great risks in the future.
US Oil on November 16 is a good example. The suppression of crude oil by the epidemic is mainly due to the relationship between supply and demand. Everyone is isolated at home, and the demand for crude oil has been unable to increase. When Pfizer of the United States announced the news of the vaccine, the confidence of the market was greatly boosted, and everyone will be able to play happily again soon. Global air traffic has thus revived hopes for a recovery, which has also contributed to further strengthening of fuel demand.
Investors pulled almost $500 million from the world's largest oil ETFs into crude oil. It can be clearly seen that the market has been affected by funds. Not long after, professional reports pointed out that the research report released by Pfizer was just a very normal report. Although it showed that the research had progressed, it was still some time away from the finished product. Then, Biden said that it would take several months to get a new crown vaccine.
The fundamentals are repaired, the price moves closer to the fundamentals, and falls.
Looking at another picture, the upper left corner is funds, which can be released by the central bank or finance. As mentioned above, funds are not directly reflected in the price of the product. It will form a cycle among the residential sector, corporate sector, financial and other sectors, generating and promoting changes in the behavior of participants in the real economy.
For example, when the central bank releases funds, the interest rate of corporate loans has fallen, which is conducive to corporate investment; if the government subsidizes the residential sector and the corporate sector, the consumption capacity of the residential sector will increase, and these will be transmitted to economic data. Will report back again.
How do you understand this? Finance releases funds to the real economy, and the income or savings of the household sector in the real economy increases, which is converted into consumption. Who will the consumption go to? Consumption is given to the enterprise sector, and the enterprise sector will get more revenue and profits, and will invest again. This is what happens with feedback in the real economy.
Expert investors or speculators will see these feedbacks in the real economy. When participants in these financial markets see that the funds released by the central bank and finance enter the real economy, change the operation of the real economy, change economic data, and change the operating data of companies in various industries, they will also change the direction of investment transactions. The price of the variety will change, and a feedback loop will also be generated, which is generated in the financial market.
In the real economy, economic data will be obtained through the cycle of the entire real economy, or the quarterly and semi-annual reports of the fundamentals of listed companies, or the inventory change data of major assets or commodities, etc. These data will be related to the price of the product. There is a corroborating or falsifying relationship between them, which in turn creates a feedback loop.
Therefore, there are three cycles in total, the first is the real economy, the second is the financial market, and the third is between the real economy and the financial market.
For example: the picture below is a combined data chart and product price chart. In the first column on the left (from top to bottom), the yellow line in the top graph represents the S&P, and the purple line represents U.S. debt. The second picture is the Fed interest rate; the third picture is WTI crude oil; the fourth picture is the US epidemic data; the fifth picture is the size of the Fed's balance sheet; the sixth picture is the US M1 currency.
At the beginning of this year, the new crown epidemic began to spread in the United States, and the Federal Reserve quickly cut interest rates and carried out QE. In this process, because of the new crown epidemic, people are isolated at home, and the demand for crude oil has decreased, so the price of US crude oil has fallen rapidly. At the same time, the price war between OPEC and crude oil prices fell further.
Through the fourth picture (US epidemic data), we can see that with the increase in the number of infections, the prices of U.S. debt in the first picture and crude oil in the third picture have fallen rapidly. Faced with this situation, the Federal Reserve and the U.S. Treasury Department took quick actions. The Treasury Department immediately issued bonds to subsidize the residential and corporate sectors. At the same time, the Fed immediately purchased bonds in the domestic market, so the Fed’s balance sheet expanded rapidly (the fifth picture). Because the Federal Reserve directly entered the interbank market, the M1 of the United States rose rapidly (the sixth picture).
The middle column is economic data, the first is the number of flight departures in the United States; the second is the truck freight mileage; the third is retail sales month-on-month; the fourth is the amount of electronic consumer goods snacks; Computer index.
We can see that with the development of the epidemic, many flights have been grounded. At the same time, the transportation data also experienced a rapid decline, the retail sales data also fell rapidly, and the sales data of consumer electronics, such as computer equipment, also fell rapidly. The trend of the Nasdaq Computer Index in the bottom picture, we can see that there is also a rapid decline.
Under the circumstances that the economic data at all levels were not satisfactory, the Federal Reserve and the Ministry of Finance responded quickly, including purchasing bonds in the national bond market and directly subsidizing enterprises and the household sector. We can see that after the Nasdaq computer index began to rise, some friends may conclude that it was driven by funds from the Federal Reserve or the Ministry of Finance.
As mentioned above, funds and fundamentals have different impacts on prices, and funds first enter the real economy. During the COVID-19 outbreak, people may take fewer planes, and may not go out to transport trucks for the time being, but everyone has to work from home, and when they work from home, they will buy more computer equipment, network bandwidth has also increased, and mobile devices have also increased. increase, many companies have to purchase more servers and computers. Correspondingly, sales of electronic consumer goods will increase rapidly. This is reflected in the companies related to computers and network communications in the Nasdaq index, which is the rapid increase in revenue.
Therefore, after April, the Nasdaq Computer Index and Nasdaq rose rapidly. From this, everyone will understand that the market is not entirely a hype of funds. In the course of economic operation, funds come in only after various sectors in the economic cycle have been changed. So it's not a market that is entirely driven by funds released by the Fed or the Treasury. Did you say that there is credit for promoting the market? Yes, but only for a short period of time.
Look at the column on the right again, the first is the Nasdaq computer index; the second is the annual growth rate of e-commerce in the United States; the third is the overall passenger traffic index.
After the outbreak of the new crown epidemic in the United States, after the reduction of transportation and aviation activities in the United States, as a trigger event, it promoted the further outbreak of e-commerce more quickly, resulting in the increase in the Nasdaq computer index and related industry revenues. Substantial growth.
Finally, to sum up, prices are not entirely driven by funds, and long-term or relatively obvious changes in product price trends are all supported by fundamentals.
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