Wang Qian | The US dollar may weaken in the second half of the year

 
The moderator for the first roundtable discussion was Shen Jianguang, chief economist of JD Technology Group.Chief economists aroundGlobal Economic OutlookThis topic was discussed in depth, with the consensus being that the global economic recovery in 2021 will be divergent, and the upside risks to the US economy are high. However, the chief analysts held differing views on whether there will be sustained inflationary pressures and the spillover effects of rising US Treasury yields on international financial markets.
 

Wang Qian

In his speech, Wang Qian, chief economist of Vanguard, pointed out that2021The US economy performed exceptionally well in the first half of the year, with capital flowing from emerging markets to the US. However, the dollar may weaken in the second half of the year, and capital may flow out of the US again.In the post-pandemic era, the characteristics of low growth, low interest rates, low inflation, low investment returns, and high uncertainty present significant challenges for investors. Wang Qian is not pessimistic about the performance of risky assets, but some regions and sectors, including the US, emerging markets, and Chinese stock markets, as well as growth stocks and large-cap stocks, are overvalued, experiencing high market volatility and low long-term investment returns. In the long term, we are more optimistic about stock markets in non-US developed regions, value stocks, and small-cap stocks.
 

Wang Qian's speech

 
The following is the full text of the speech, which has not been reviewed by the speaker:
 
Wang Qian: Distinguished leaders and chiefs: Good afternoon!
 
Thank you, Dr. Shen. As you mentioned before, I hope everyone can focus on their own strengths. I'm currently in the United States, and today I'd like to focus more on the US economy, inflation, and policies, sharing our perspective on the financial markets.
 
As mentioned earlier, 2021 saw a continued global recovery, albeit with some divergence. The US economy stood out in the first half of the year, while the recovery of non-US economies is likely to accelerate in the second half as vaccination efforts progress globally, which has significant implications for financial markets. With the US economy performing exceptionally well, we've seen a stronger dollar, rising US yields, and global capital outflows from non-US markets, particularly emerging markets. However, if a synchronized recovery occurs in the second half of the year, the dollar may weaken, potentially leading to a return of capital to the global market, especially emerging markets.
 
Of course, we see that the US economy has benefited from strong fiscal policy and smooth vaccination. We expect the US economy to grow by 7% this year. However, the upside risks are actually quite significant. As mentioned earlier, the household sector has added about 3 trillion in savings. If the household sector decides to use this 3 trillion and there is a surge in retaliatory consumption, we think the US economy could really grow by close to 10%.
 
Regarding vaccination, I'm currently in the US, and I'd like to share some grassroots observations. Two observations are particularly interesting: First, the US is really serious this time. Besides hospitals and pharmacies, many stadiums are being used as vaccination facilities. For example, stadiums are being used for vaccinations, and these are operated by the Federal Emergency Management Agency (FEMA). One stadium can vaccinate 4,000 to 5,000 people a day, and vaccinations are even available on weekends. Chairman Xiao mentioned that we hold meetings on Saturdays, which is quite normal in China, but the level of effort put into this by the US public sector is unprecedented. Second, there are absolutely no problems with vaccine production, transportation, and supply. The main uncertainty comes from individuals' willingness to get vaccinated. We've found that in states with higher "red" (representing the US's political leanings), it's easier to get vaccinated. For example, in states like Georgia, many people are unwilling to get vaccinated, even though there are plenty of vaccines available; appointments aren't necessary, you can just go and get vaccinated. In bluer states like California, the willingness to get vaccinated is higher, and most people are on waiting lists. I also agree with Jian Guang's point that the US can basically achieve herd immunity by May. Globally, besides Israel and the UK, the US should be at the forefront of this process. This is the perspective of the US economy.
 
Second, there are concerns about inflation in the financial markets. Of course, economic recovery will inevitably lead to reflation, especially in the United States. Due to rising commodity prices, supply bottlenecks, and a low base effect, inflation in the US may have exceeded 2% starting in April. However, after these technical and temporary factors subside, core inflation will return to below 2% by the end of the year. This is one of the reasons why the Fed is not too worried about inflation so far. This year, it is temporary, technical, and structural.
 
2021Looking ahead from now, will there be widespread and sustained inflation?The biggest variable is the direction of inflation expectations. The Fed currently uses the FRB/US general equilibrium model to predict its growth and inflation. In this model, inflation expectations are an exogenous variable. Therefore, as long as this parameter remains unchanged, and inflation expectations are not altered, the Fed's current conclusion is that inflation will barely reach 2% by the end of 2023. In our model, inflation expectations are an endogenous variable, particularly affected by fiscal expansion. Fiscal expansion itself and the resulting changes in the output gap both influence inflation expectations. Our model shows that every 10 basis point increase in inflation expectations leads to a sustained 20 basis point increase in actual inflation. Therefore, in the baseline scenario, if an additional $500 billion in fiscal stimulus is added on top of the current $1.9 trillion, US inflation will consistently exceed 2% by mid-2022, earlier than the Fed's expectations.
 
While we believe inflation may overshoot the Fed's expectations earlier than anticipated, the Fed still has some room to maneuver within its average inflation target framework, and therefore is not in a hurry to tighten policy. Especially given that the job market will take a long time to recover to pre-pandemic levels, we expect the Fed to raise interest rates perhaps in the third quarter of 2023, slightly earlier than the 2024 figure shown in the Fed's dot plot. Since the end of last year, the yield on 10-year US Treasury bonds has actually risen sharply, largely due to rising inflation expectations. However, the recent rise is also due to rising real interest rates. The rise in yields reflects market inflation expectations, which we believe is reasonable. However, it also reflects market concerns that the Fed may be raising rates too early, which we think is a slight overreaction. Currently, we see a reasonable estimate for the 10-year Treasury yield at around 1.9%, taking into account the possibility of further increases in inflation expectations in the near future, even into 2022. But even at 1.9%, what does that mean? This means that the real rate of return is negative, but it still plays a relatively supporting role in the economy and financial markets.
 
Thirdly, the financial market.Financial markets have experienced significant volatility, with investors particularly concerned about overvaluation and potential bubbles in risky assets. In our view, the reasonableness of asset valuations depends on the current macroeconomic environment. As mentioned earlier, while interest rates have rebounded, they are not considered high given the strong economic recovery. With real interest rates still negative, they can support risky assets. Therefore, we are not overly pessimistic about the overall performance of risky assets. However, it is undeniable that valuations in some regions and sectors are excessively high. In such cases, the risk of valuation contraction and downward adjustments is relatively high, and long-term returns may not be ideal. We can discuss this in more detail later. Regionally, we are more optimistic about non-US developed markets, especially European markets. In terms of style, we favor value stocks and small-cap stocks. Furthermore, many investors are concerned about inflation risks, and they can consider over-allocating to commodities, gold, and government bonds in their asset allocation.
 
In the long run, the post-pandemic era is characterized by "four lows and one high": low growth, low inflation, low interest rates, low returns, and high uncertainty. We do not believe all countries will become like Japan, but we also do not believe productivity can increase as rapidly as it did in the 1990s. Even normal economic growth and interest rates in the future will be below historical averages. Even if the Fed completes the monetary normalization process, we believe the long-term 10-year Treasury yield will be around 3%, far below the historical average of 4.5%. Global 60/40 portfolios will likely only return 4-5% over the next 10 years, far lower than the 9.5% since the 1970s and 7.2% since the 1990s. In this low-return investment environment, it is very challenging for investors. There may be two paths to take: either take risks—there is no free lunch, and high returns come with high risks—or, for us, develop sound financial planning, increase income and reduce expenditure, build reserves, pay attention to investment costs, adhere to long-term investing, and actively diversify our investments. This is a more ideal path.
 
Thank you everyone!
 
 

Group photo of participants at Roundtable (I) Global Economic Outlook

 
2021On April 10, the "Tsinghua University PBC School of Finance Chief Economist Forum" returned online after a two-year hiatus.This forum consisted of two parts: keynote speeches and roundtable discussions. It was held online and streamed live across the entire network, ensuring a smooth exchange of ideas and perspectives. The forum invited over twenty prominent guests to gather virtually and engage in in-depth discussions on topics such as the global economic outlook, China's macroeconomic and policy outlook, money and credit in the post-pandemic era, and carbon neutrality and the macroeconomy.