8 Economists' Investment Tips
Fu Peng: “Gold Investment Thinking Special Training” - Looking at Structure through Gold
Summary of this issue
· What exactly is gold?
· A brief discussion on real interest rates and gold from the perspective of trading and investment
What's in this issue
Hello everyone, Wall Street News users and friends, I'm Fu Peng.
This is probably the syllabus for this course; this syllabus actually covers all of our core content. First, what we need to know is a high-level summary of the previous sentence. What exactly is gold? First, it is the closest commodity to money; second, it targets interest rates and credit. Of course, everyone must know that interest rates are divided into nominal interest rates and actual interest rates. Why is this important? Because there's another simple cognitive bias.
To take the simplest example, ordinary retail investors will think that interest rate hikes and interest rate cuts will affect the price of gold. This is the biggest problem. I don't really want to answer this question anymore because I need to explain it from beginning to end. The interest rate hikes and interest rate cuts that everyone sees are nominal interest rates, while so-called interest rates and interest rates in credit actually refer to actual interest rates. The simplest formula here is the two components of real interest rate, nominal interest rate and inflation.
In other words, simply speaking, any variable is wrong. For example, if you raise interest rates, gold falls; gold rises when interest rates are cut; gold rises when inflation is inflated; gold falls when deflation occurs; gold falls when deflation occurs, wrong. Can you understand, this is the simplest mathematical formula. I think most people have this math ability. It's not a complicated formula, or a relationship between two variables.
Changes in real interest rates are a relative concept, not an absolute one. Simply put, will real interest rates rise when nominal interest rates rise? Or is real interest rate bound to rise due to inflation? Will real interest rates fall due to deflation? The easiest way to answer these questions is to do a two-part equation. The rate difference between the two variables generates the actual interest rate.
Here's why we should look at actual interest rates rather than simple nominal interest rates. However, with regard to the Federal Reserve's interest rate hikes and interest rate cuts, it is necessary to have a deep understanding of nominal interest rates. In principle, the nominal interest rate should be split into two more. It is already known that the interest rate and nominal interest rate expectations are known, and the inflation/deflation and inflation/deflation expectations are known. Why add the words expected? In other words, let's add another variable to this formula, that is, the expected variable. That's the point. What? The financial market is a forward-looking reaction; it is not a forward-looking one.
Although I'm currently working as the chief economist at Tohoku Securities, what is actually my biggest role? Actually, I just solved the biggest problem between researchers and fund managers, or traders. What's the biggest problem between them? It's not that research is useless; research is useful, but the researchers didn't grasp what traders wanted most. Traders look at variables expected by the market. We call it first-order guidance, but researchers study static variables.
In the middle of all assets, in the middle of all analytical methods, you'll find this problem. For example, it's easiest. In commodity analysis, researchers analyze a static balance of supply and demand, but traders trade dynamic changes in the balance between supply and demand. This raises the easiest question, so I'm just asking everyone, is it certain that inventory will drop when it's high? Is there a definite increase when inventory is lower? This is one of the easiest cognitive biases. Why is that?
The high and low levels of inventory are known. At the time of the study, the researcher studied the balance sheet of supply and demand, and found that the current inventory is high, but at the time of trading, traders think that prices have responded structurally to high supply, such as contango or backward, or low prices in recent months. He is more concerned about whether high inventories continue to be high, or whether high inventories have begun to fall.
Simply put, if you remove inventory, you can go up, and when you accumulate inventory, you can go down. People often say that inventory prices can rise at such a high level; you are all wrong. Is that really wrong? Do you really think traders are stupid? Of course it's not stupid; what he is trading is a spot price that has already responded to the current problem.
While studying the structure of gold, I discovered through observation that many domestic traders have a habit. This habit also causes Wall Street News and other apps to use a function. What kind of function? In other words, the most used by everyone — instant news, real-time push the latest data.
This has led many traders to trade what? In my words, it's just trading numbers. Yes, but robots are now basically used for spot data such as actual transactions. In other words, robots are used to grab keywords. It is very smart; it captures price changes in the next 3 or 5 minutes, and it doesn't respond at all after this time. why? Very simple, is it trading numbers?
I don't remember if it was 10 or 15 years ago. At the time, I shared it with you on the TK forum. I said the moment before the transaction data came out, was the data traded? No, trading is a change in your mentality, and your mental changes are unstable within 3-5 minutes, but most traders will slowly enter a stable state after 3-5 minutes. why? Because this number is not what you expect; it is used to prove falsification; all research on economic data is used to falsify it.
Many people will ask me, Mr. Fu, will you be staring at the screen when the employment data comes out? I said I'm sleeping. He said why aren't you watching? I said why should I keep an eye on it? Simply put, you already know it's bad, then leave the rest to trading, strategy, and risk control, rather than managing those few minutes of fluctuation. Chasing that fluctuation, you'll know after a long time; it's very sour. Simply put, that kind of fluctuation is not something strategic traders need to catch.
This brings up a very important question, what are the expectations? You've studied what everything is actually used for, which is critical. Actually, after sorting out the entire macro framework, you can be very accurate in judging forward-looking expectations, and not make mistakes in this regard. I often tell you that you should not interpret the data as macroeconomic analysis; this is wrong.
In particular, I saw some macroeconomic analysis reports. Actually, they don't have much value; they are just interpreting the numbers; it's useless. I've probably looked through the database for really useful macro reports. Are there any? Yes. Simply put, many brokerage firms and many researchers put a lot of effort into studying this stuff, but you can see how many hits are very low. Why? It's long, it's “useless”, what does that mean?
Many people have probably read this report. It's better to just tell me whether it's going up or down. Why is it going so hard? He doesn't think about this stuff. This thing is actually the most valuable thing; it helps you be accurate in terms of expectations. Simply put, if a person drinks a lot, you know that the probability of a bad liver is very high; it's that simple. That's the framing stuff we're going to do.
The top level should actually be called a macroeconomic framework, not macroeconomic data analysis. Therefore, in this course, I will hardly show you employment data or unemployment data. The reason is simple; this data is not something we should pay attention to in this section. The most valuable thing at the top level is the content of this framework. After analyzing the framework, you can slowly learn how to read economic data, then optimize strategies, optimize trading habits, fund management, etc., and that's it.
As for the analysis of the top-level framework, I've actually already told you what the middle view is, that is, how expectations for actual interest rates are going. Simply put, in the overall economic analysis, what is the origin of inflation expectations? What variables do you want to focus on? What generates nominal interest rates? But there is another structural problem here. What is interest rate disease? Simply put, why can gold keep rising and interest rates falling indefinitely? This is an important question for you to think about.
After understanding the interest rate disease, you know that in fact, during the period of gold price adjustment from 2012 to 2015, why can't it be easy to say that the big gold bull market is over. The reason is simple. If you know exactly what interest rate sickness is, you can probably understand that the increase in nominal interest rates around the world will be very limited. Simply put, after a year or two, two or three, your health will stop working right away. In other words, as people often say, once you become addicted to drugs, you can't quit. Basically, this is the truth.
So what will people find out about what gold will become in the end? A credit counterpart in the true sense of the word. Simply put, credit is being wasted other than restructuring. We continuously consume credit and then restructure it, this cycle.
So when it comes to gold, there's probably only one thing -- every time credit is consumed, gold is a big bull market. It's just that when compared to other assets, people will say that gold may not be the best investment product in recent years. This is from an investment perspective, but if you study and analyze the general trend structure, you wouldn't say such a sentence.
I don't think it's necessary to decide whether to allocate gold by running fast or slow. Simply put, once your configuration is out, you can just put it there as a stable disk. It's a long-term thing until the credit is completely lost, then we restructure it. Therefore, to a certain extent, the price of gold can reflect our current credit and interest rates from another perspective. Of course, credit and interest rates must be linked to something, that is, debt.
Simply put, debt, credit, and interest rates are actually part of the same coin. But at a certain point, it will be decoupled, what does that mean? Because interest rates are bottom-line, debt is unlimited, and credit losses are limitless, we will discover what social phenomenon we will directly face when nominal interest rates or actual interest rates reach a certain extreme value?
Dalio shared a picture with you in “The Debt Crisis,” and this picture will also appear in our next course. What kind of picture? He said that current interest rates are very similar to those before World War II. In fact, this sentence also tells us another thing. Interest rates are very much like before World War II, credit is very much like before World War II, debt is very much like before World War II, then the solution will also be very much like before World War II.
So what are we really worried about these past few years? 2020 was definitely not as simple as the pandemic, and 2016 and 2018 were not as simple as Trump coming to power and provoking trade frictions between China and the US. There is a major credit and debt crisis hidden behind these events. Of course, as for its solution, to be honest, our lives are limited, and our history is also relatively limited. What we can find are the two reconstructions of World War II and the 1970s after World War II. Although the methods are different, they are all very cruel.
So to put it bluntly, it's the kind of reconstruction from the 1970s and 80s; worse, it's the reconstruction of World War II. For us, to some extent, this isn't a great time. This is a hint that gold gives us to some extent.
When you see that gold is still accelerating after rising above 2000, ask me where it will rise; I can only tell you, let the poor figure it out. Never ask this kind of question, and I can't answer it, because it doesn't make sense. Of course if you're a trader, I'll give you a suggestion not to get too obsessed with absolute prices. Simply put, like the volatility of gold, if you do the math, you probably know that the fluctuation of 20 to 30 US dollars can have no reason.
Why look for a reason for the price fluctuation of 20 to 30 US dollars? It's better to just pinpoint it; it's meaningless. What we should be concerned about is large trend changes within this range, or price fluctuations caused by exceeding marginal values. Only then is it worthwhile to explore the reasons for this. Otherwise, some people will not be able to sleep if their positions are heavy and fluctuate by 5 US dollars, so there is no need to sleep. I still have to ask why it fluctuated by 5 US dollars. I don't know; I'm also a pretty straightforward person.
This helps many traders break the magic in their hearts. Of course, some people would sum it up in one sentence: clearance. What is clearance? Clearance is not a money management concept. Clearance is a psychiatrist. Don't use it as a means of money management; it doesn't control money; it controls your heart; it's a big problem in your heart.
From here on, it's actually this framework: debt, credit, and then sinking to the midpoint, its direct expression, interest rates. Of course, I've said it before. We must pay attention to the fact that in the next few months, or as it has now been shown, the median interest rate has come to an end, but macroeconomic credit and debt are deteriorating. In the process, our meso analysis method, which simply uses actual interest rates to compare gold, may slowly decouple.
But don't be confused about this kind of decoupling, why? It's getting worse because at the end of the day, it can't be reflected. The rest is the application level. Regarding gold and the exchange rate, they are actually all derivatives of interest rates. I'll probably click here. Then there is the relationship between gold and other types of assets, something that is often paid attention to at the trading level, and finally ends with the silver market.
That is the content of this course, thank you all.
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