The question that I get a lot about the market is, will the Higher for Longer continue?

I woke up late this morning because I was sleeping watching soccer until late yesterday morning. T.T I think it was a disappointing game. Still, I think I will remember the fighting spirit and passion that the players showed during their advance to the semifinals. I think this year’s Asian Cup was the most popular event ever. I’m sure you’ll be disappointed as much as you’re interested, but it’s time to say thank you to the players for their hard work.

The question that I get a lot about the market is, will the Higher for Longer continue? My answer is yes, first of all. Interest rates have already come down, what do you mean? Interest rates continue to rise? No, that’s not true. Interest rates are comparable. The comparative level should be subject to comparison. If the comparison is 10 years after the financial crisis, when interest rates were so low, the term “higher” would be correct. I don’t think it’s going to be that low interest rate. … Interest rates that are quite high compared to the past have been going on for quite a long time. I think that’s the key to Higher for Longer.

In November of last year, Powell made a comment that closed the need for a further rate hike, and in December, he surprised the market by opening up the possibility of a rate cut. In the 2000s, the Fed’s pattern of benchmark rates was really standardized. When you raise it, you raise it slowly. When you lower it, it comes down hot. The pace of the rate hike in 2004 was narrower than that of the rate hike in 2000. When we raised rates in 2015-2018, they raised rates very carefully. They probably worried a lot about the fragile global financial markets, where even a slight rate hike could cause them to fall. Instead, there’s a trauma that if there’s a problem, that the weak market will falter, so we tried to catch it hotly and fix it in advance. There’s no reason to interpret it as a trauma from the financial crisis.

Slower, slower, faster, hotter, faster and hotter when you lower. This was the pattern. If you apply the pattern from 2000 onwards, you can see that the Fed has hinted at a rate cut, and that’s what’s changed. The Fed is currently marking a base rate of 5.25% to 5.5%. If you cut it by 25 bps, you can get 22 rate cuts. That’s 22 baskets full of rice cakes, isn’t that coveted? Once it’s unraveled, you’re going to have 22 rate cut gift packages pouring in, and the market is going to be full of happiness. And because the Fed has already used unlimited quantitative easing cards that it hasn’t experienced in the past, the pivot this time can go really strong, like never before.

If you think about how a crisis comes… I think it comes when you feel hopeless that no one can control the bad news. During the financial crisis, people felt the fear that the earth could fly as many derivatives collapsed. They said there was no way that the Fed could solve this huge problem if it cut interest rates. And what represented that fear was the unexpected bankruptcy of Lehman. During the COVID-19 crisis in 2020, no matter what the Fed did, it said it could not cure the virus. That may have been the reason why the financial market, which has no hills to lean on, melted. Now it looks like there are a lot more Fed weapons in the armory than ever before. And there are a lot more crisis response manuals than ever… So, because you’re going to release money preemptively… The problem only provides an opportunity to buy stocks at low prices. When a crisis comes, it’s important not to sell stocks, but to keep your existing assets. This is because more money is released, further increasing the value of existing assets. In times of crisis, less selling than in the past, stronger pivot expectations, and more buying, so the flow of asset prices can be formed differently.

Well, this pattern may look a little different in the future. Prices are higher than they were in the past. I think it’s going to come down to 2% sooner or later. But growth also seems to be somewhat different from the past. Changes since the 2010s, as the United States ramped up its energy production around shale, prevented the dollar from falling as low as it was in the 2000s, despite a massive trade deficit in the United States. And now it’s not just changes that attract corporate investment like the IRA, it’s productivity innovation like AI, that can create a stronger U.S. economy than it used to be. And that’s going to put global capital in the U.S. … and that’s how much growth in the U.S. can flow in a different way than it did in the past.

Then in the past, a 50-year-old guy who’s losing his muscles has become almost like a body figure because he’s exercising. Then in the past, he had muscle damage just by hearing 10 kilograms, and he was lying down for days, and now he’s about 10 kilograms easier. You have to be about 20 kilograms or so to get some exercise. You feel comfortable with this level of weight. The economy is similar. Wouldn’t the United States have the strength to withstand even the 3% to 4% base rate? Looking at this employment indicator, I realized that even with the current 5.25% to 5.5%, the rate is much better than in the past. In this case, even if we cut interest rates, we won’t have to do as much as we used to.

The period of discriminatory growth in the U.S. was in the mid-to-late 1990s. The result was a dot-com bubble, but at the time, the U.S. economy was quite strong. After a strong rate hike to 6% in 1994 to curb inflation, the Fed cut its benchmark interest rate three times in 1995. And we were able to see a stable U.S. economy. Looking at the strengthening U.S. economy, we raised our benchmark interest rate once in 1997. After the bankruptcy of the world’s largest hedge fund called LTCM in 1998, there were three additional cuts, but they didn’t lower interest rates as quickly and hot as they do today. Perhaps the point we should refer to is that time.

Even if interest rates are lowered, they are later than the market expected and lower than the market expected. By the old standards, even if the base rate is lowered to 3.5 to 4.5%, can this level of interest rates be called low interest rates? Delayed… And a small rate cut is a case of proof that H4L can continue for a certain period of time. Yes, there will be a base rate cut. In the previous essay, I mentioned a possible cut schedule scenario for the cut… But this cut will not cause H4L to disappear immediately. We will try to keep the residual inflation in check and promote stronger growth… This is today’s essay line. Thank you.