If the US misjudges inflation, it may raise interest rates as sh

14 Feb 2022

In his previous article, SIULUNG suggested that "if the US Fed misjudges inflation, it will raise interest rates as sharply as it did in the 1970s" and that "stagflation" was the answer, but unfortunately, the response was "the US owes a lot of money and dares not raise interest rates". The sharp rise in the US Consumer Price Index (CPI) in January and the highest annual increase in inflation in 40 years may have fuelled speculation in the financial markets that the Fed will raise interest rates by 50 basis points next month. But many are still very optimistic. Once again, I would like to remind you: don't over-leverage. In my analysis, I have judged that 2023-2024 will be the post-QE era, so we should pay attention to the shocks in the property market in 2023-2024.

And now the US CPI rose by 7.5% in January to a record high since 1982, and the momentum of inflation in the US is still set to rise, especially in food and food prices. The Bank of England's inflation expectations are the reason for this. The Bank of England accelerated interest rate rises, with UK CPI inflation rising to 5.4% in December, almost 1 percentage point higher than expected when the report was released in November. The Bank expects inflation to rise further in the coming months, approaching 6% in February and March before peaking at around 7.25% in April, with the latest estimate about 2 percentage points higher than expected in the November report. The chart below shows that high food prices have accelerated inflation.

In the past, inflation in the US has rarely been above 5%, and every time it has risen above 5%, the Fed has essentially reacted very quickly and raised interest rates.

The first cycle of rate hikes was from 1983.3 to 1984.8, when the benchmark rate was raised from 8.5% to 11.5%.
Second: 1988.3-1989.5, with the base rate rising from 6.5% to 9.8125%.
Third round: 1994.2-1995.2, with the benchmark rate rising from 3.25% to 6%
Fourth round: 1999.6-2000.5, with the base rate increased from 4.75% to 6.5%.
Fifth round of rate hikes from 2004.6-2006.7, with the base rate rising from 1% to 5.25%.
Sixth round: 2015-2018, with the base rate rising from 0.25% to 2.5%.

If the Fed starts to move, it may do so faster and more sharply than the market predicts. As SIULUNG said, "If the Fed misjudges inflation, it will raise interest rates as sharply as it did in the 1970s". In an earlier interview with a financial magazine, Bruce also pointed out that "whether there will be a similar oil crisis in the 1970s to accelerate inflation, I think so in terms of the cycle.

In the 1970s, it took about 2 years for the US to raise interest rates by 10%.

Stagflation in 1970: The US gave up on the economy and raised interest rates sharply
In 1972, natural disasters swept the world, reducing total world food production by 2.9% compared to the previous year and causing severe famine in many countries.


Stagflation has dealt a fatal blow to the US economy. On the one hand, US industry experienced a prolonged decline in production, with the 1973 economic crisis causing a 15.3% drop in US industrial production for 18 months and the 1979 crisis causing an 11.8% drop in US industrial production for about 44 months. On the other hand, a large number of businesses went bankrupt and unemployment rose to the highest level of any post-war crisis, with the 1979 crisis causing nearly 15,000 businesses to go bankrupt and the unemployment rate reaching a peak of 9.2%, with 8.36 million people unemployed.

From 1979 to 1980, the US inflation rate remained in a vicious double-digit range, with inflation rates approaching 15%, interest rates on US Treasury bonds exceeding 17% for three months, and interest rates on commercial bank loans peaking at 21.5%. The federal funds rate was raised to a high of 22.36%. The high interest rates soon punctured the economy, with GDP growth falling to -1.8% and unemployment at 10.8%.

The 35-year cycle of US debt
The author has repeatedly suggested that the US bond interest rates, whether 10-year or 30-year, have become an even 35-year cycle, which is a 35-year bear market from 1946 to 1981 and a 35-year bull market from 1981 to 2016. Between 1981 and 2016 there was an unbroken downward trajectory for about 20 years, and recently bond interest rates have risen through.

Let's not talk about a 35-year bear market in US bonds, if the rebound in US bonds in the next few years is at a gold ratio of 0.236, then US bonds will have to rise by about 4.6% in 10 years, and if they rebound to 0.386, it will be about 6.78%. Normally, a rise in US bonds would necessitate a rise in the issuance rates of other countries or corporate bonds (i.e. a fall in prices), but if there were to be some sudden and unexpected factors in the market, it would not be easy to see the horror of the shock.

In the short term, the US 10-year yield of 2% is a short-term resistance, but once it is crossed, we can expect the US to collect water and raise interest rates at a faster pace this time.


So we will start in 2022, but over-leveraging will be the last bite of leverage, as SIULUNG said in 2019. Unfortunately, many people have increased their leverage in insurance, bonds and property markets over the past two years. In the future, we should be careful with bonds, the property market and, to a lesser extent, the stock market.

As SIULUNG mentioned in this column earlier, US stocks will fall at every seventh day, and this will also affect other assets.

Simon Smith Kuznets, a Nobel Laureate in Economics in 1971, found that a 15-25 year cycle in the construction industry is followed by an average 18 year cycle in the property market.

With the property market undoubtedly bottoming out in 2003, 2021 is likely to be the completion of this 18-year cycle. Either way, beware of the turbulence in 2023-2024.