In recent days on the Knowledge Planet, many people have asked me to talk about the impact of the Federal Reserve's interest rate cuts on domestic affairs.

Especially on the internet, there is an abundance of expert opinions about the financial war between China and the US, and the Federal Reserve's interest rate hikes and cuts to harvest the world.

However, the graveyard of prophets is often filled with various experts.

Does the dollar tide harvest exist?

Yes, it does!

But it's not something the Federal Reserve does on purpose, but rather a certainty in the capital market that is inevitably created by the dollar tide.

And what is the iron rule of the capital market?

Where there is certainty, there must be harvesting and arbitrage.

If you seize the certainty, you can harvest others, and if you are caught by others' certainty, you are the lamb to be harvested.

However, for the understanding of certainty, those various experts who have not fought in the front line of the market naturally have a vague concept.

For example, when the dollar raises interest rates, in order to seek high returns, funds from low-interest countries will flow into the United States to obtain high interest.

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Is this view correct?

Nonsense!

For any senior harvester, the first principle of investment must be certainty, which means that at the beginning of the harvest game, a complete harvest loop must be established.

Let's take the yen as an example.

It is true that the yen has low interest rates and the dollar has high interest rates.

But this does not mean that Japanese funds will flow to the United States endlessly.

The complete chain of carry trade is to borrow yen in Japan, exchange it for dollars, earn interest, and then exchange dollars back into yen before the debt matures to obtain high interest in dollars.

But the biggest uncertainty in this is the exchange rate.

If you earn a 5% interest difference in a year, but the yen appreciates by 10%, you still lose 5%.

So, you cannot conclude that funds will flow out solely based on the interest rate difference.

So, how do senior harvesters do it?

When I borrow yen in Japan and exchange it for dollars at the spot rate (long dollar position), I must also place a short dollar position in the forward exchange market at the same time.

For example, if the current exchange rate is 100, and the forward rate is 99, the exchange rate loss is locked at 1%, and if the interest rate difference can be obtained at 3% during the period.

Then the arbitrage loop can be established.

That is, I can arbitrage risk-free at 2%.

Of course, this depends on whether there is a sufficient amount of counterparty in the forward exchange market (foreign trade merchants may place orders in the forward market to lock in trade profits and become counterparties).

Don't underestimate this 2%, because the funds are borrowed, and with leverage, it is a huge profit arbitrage plate.

This is the truth of carry trade.

Every fund flowing from Japan to the United States will eventually flow back to Japan.

It must be based on certainty.

So, what kind of certainty is the harvest of the dollar tide?

Because this certainty involves the linkage of multiple financial markets, before I start this topic, I must first explain the simplest multi-market linkage harvest loop.

What is financial market harvesting?

The most typical one is to let others take over the poisoned assets (highly valued assets) that have been inflated in price.

To inflate assets, the first thing you need to do is to control the market.

Since the market price of any asset is determined by the marginal transaction price, and is not related to the trading volume.

So, to put it extremely, if you have all the chips, you can decide the market price at zero cost.

For example, if the stock price of ICBC is 5 yuan, but if you have all the circulating shares of ICBC, you can hang a sell order of 50,000 yuan per share, and then buy it yourself, which has facilitated a transaction.

Since the stock price of ICBC is determined by the latest transaction price, the stock price has increased by 10,000 times at zero cost.

And in the real harvest loop, you don't need to control all the chips, you just need to hold most of the chips and you can easily decide the price.

Generally, it starts with bottom absorption, and after absorbing to a certain extent, the market chips become less and less, so the distribution of sell order prices becomes more and more sparse.

The so-called sparseness means that the cost you pay to lift is very low.

That is, after you take a sell order, the next one is at a price much higher than this one.

Then you take the next one, and the price can rise rapidly.

When you lift the price to a very high price, you will encounter a thorny problem, that is, how to sell out?

Although you can lift the price with very little cost after controlling the market, once you start selling, the entire price system will collapse.

The leeks will scatter when they see the price falling.

You must think of a way to find some leeks and force them to be your high-priced sell order counterparty.

Is there a way?

Yes!

The secret lies in the linkage of multiple markets, which is also the key prerequisite concept for the harvest of the dollar tide.

That is, when the leeks take over the market, they must not see the collapse of the price.

Yes, what I want to say is the linkage between the spot and futures markets.

That is, in order to maintain the high price of the spot market and not be able to sell, I can secretly place short orders in the futures market at a lower price than the spot market.

So, what are the counterparts in the futures market who place long orders thinking?

They think that they can get a lower price in the futures market, and then sell at a high price in the spot market after delivery for arbitrage.

But they don't know that this leek's arbitrage cognition is exactly what you want.

And the characteristic of the futures market is that the contract orders can far exceed the spot, and have more concealment (while the orders in the spot market are limited to the total amount of the spot).

When your short orders in the futures market gradually reach the position of the spot, you can sell all the chips through the delivery of the futures short orders before the price collapses, and perfectly cash out.

And the flood in the spot market afterwards has nothing to do with you.

What is said here is a simplified version of the harvest of the dollar tide, and the real harvest of the dollar tide is an upgraded version.

That is, I don't arbitrage through futures delivery, but directly smash the plate in the spot market and then arbitrage through the short orders in the futures market.

This kind of arbitrage is more fierce than the delivery method.

This is also a routine that Soros has used many times.

Well, now we can finally start to describe the harvest of the dollar tide.

When the dollar starts to raise interest rates, the harvest against other countries starts simultaneously in the bond market, stock market, and foreign exchange market.

The harvest will require certainty, so what is certainty?

Assume the counterparty is country B, and the dollar is a fixed exchange rate system.

Once the exchange rate is fixed, then according to the example at the beginning of my article, the carry trade has certainty.

And in order to obtain country B's currency that can be exchanged for dollars, either sell country B's bonds to obtain country B's currency, or borrow country B's currency from financial institutions, all of which will lead to a decline in the bond market or market interest rates (note: the rise in bond yield and the decline in bond prices are the same thing), and country B has to sell dollars to maintain a fixed exchange rate, which will consume foreign exchange reserves, and the consumption of foreign reserves will lead to the central bank's balance sheet contraction (students in the Knowledge Planet can refer to the central bank's balance sheet analysis I posted in the essence area on September 11).

And the balance sheet contraction also leads to tight liquidity and rising market interest rates.

This leads to a decline in the bond market.

That is, the first certainty is the decline in the bond market.

And the decline in the bond market leading to higher bond yields will attract other equity market funds, such as the withdrawal of funds from the stock market will cause the stock market to fall (financial institutions adjust the proportion of bonds and stocks).

If country B is not a fixed exchange rate, the central bank will not sell foreign reserves to stabilize the exchange rate, but follows an independent monetary policy (such as Japan), then the dollar long position transaction caused by the carry trade will lead to the immediate depreciation of the yen (although there are locked profit forward dollar short positions, but the forward market is likely to have new carry plates to hedge).

That is to say, the decline in the bond market and the foreign exchange market, there must be one, that is, if I short both the bond market and the foreign exchange market of country B at the same time, I can make a profit in at least one market, or even both markets.

This is the impossible triangle of Mundell.

That is, under the condition of free capital flow, you either choose independent monetary policy (do not follow the US interest rate hike), then the price is the devaluation of the exchange rate (such as Japan), which can be shorted for arbitrage in the foreign exchange market.

Or you maintain the stability of the exchange rate, the price is no independent monetary policy, you must follow the interest rate hike, which can be shorted for arbitrage in the bond market.

And we have given up the free flow of capital, so we have achieved both independent monetary policy (interest rate cut) and exchange rate stability at the same time.

Based on this certainty, let's look at a few typical harvesting techniques, all of which are based on the second harvesting plate example in my previous text.

The first one is Soros's speculation against the pound in 92.

First, he accumulated a large amount of pounds by borrowing and exchanging dollars in the UK (the chip is the pound), and the process of selling dollars and buying pounds led to the continuous appreciation of the pound (lifting the chip price), and at the same time, he placed short orders for the pound in the futures market.

Finally, he smashed the plate in the spot market and made profits in both the spot and futures markets of the exchange market.

But if the Bank of England could detect it in advance, when Soros exchanged pounds, it became its counterparty to sell pounds and buy dollars, increasing the dollar foreign reserves to expand the central bank's balance sheet to release pounds, then Soros could not succeed.

So after this technique was exposed, Soros changed his technique when speculating against Thailand.

This time the chip changed from the baht to the dollar.

Under the background of the dollar interest rate hike, Thailand is a fixed exchange rate system.

Therefore, there is certainty in carry trade.

Soros borrowed a large amount of baht in Thailand and exchanged it for dollars to do carry trade plates.

This operation of exchanging dollars made the Central Bank of Thailand have to continue to sell dollars to stabilize the exchange rate until the foreign exchange reserves were exhausted and collapsed, and the baht fell sharply (the sharp fall of the baht is equivalent to the sharp rise of the dollar against the baht, which can be regarded as the lifting of Soros's dollar chip price).

Then Soros placed short orders for the dollar in the forward exchange market while lifting the dollar in the spot market.

Because he had to return the baht in the end, when he finally exchanged the spot dollar for the baht, the baht began to appreciate.

So the short orders in the dollar forward exchange market also made a profit.

The third example is the speculation against the Hong Kong stock market in 98.

Soros changed the chip to stocks this time.

He also borrowed a large amount of Hong Kong dollars to buy stocks to absorb the chips, and after accumulating enough chips, he placed short orders in the Hang Seng futures.

Then he smashed the plate in the spot market, but encountered our national team.

When Soros sold stocks to smash the plate, the national team stabilized the stock market by eating up stocks one by one, causing the short orders of the Hang Seng futures to fail.

But also because the national team took over at a high position, Soros made a lot of profit in the spot market.

After deducting the loss of the futures index, it was also a small profit.

This is equivalent to the futures delivery in my previous example.

The intervention of the national team is only to reduce losses (block the profit of the Hang Seng futures), because the profit plate has been locked.Alright, now we can finally address the question posed at the beginning of the article: Does the US dollar interest rate cut affect us?

The answer is: No!

Because our capital flows are not free, all the certainties based on the premise of free capital movement in the dollar tide are invalidated.

For instance, in the past two years, our bond market has still been rising.

If you engage in carry trade, you still have to pay the price of bond market losses, and the outcome is that you end up with nothing.

From the data, we can also see that during the entire cycle of US interest rate hikes, the central bank's foreign exchange reserves did not decrease at all, meaning compared to the non-hike period, no more funds flowed to the US.

Today's foreign exchange reserves are even 100 billion more than when the US began to raise interest rates in the first quarter of 2022.

Since there is no capital outflow, how can there be a return of funds?

Secondly, during the US interest rate hike period, we have been lowering interest rates, following an independent monetary policy.

And limited by the bank interest spread, we don't have much room for further rate cuts.

However, if someone believes that a US dollar interest rate cut will push up housing prices and buys at high levels, it may become an opportunity for them to return to poverty more quickly.

Of course, there is also the only reverse possibility, which is that everyone firmly believes that a US dollar interest rate cut can push up Chinese housing prices, so everyone goes to buy houses to expand their balance sheets, resulting in the self-fulfilling function of expectations.

That is, although the US dollar interest rate cut itself is useless, if everyone firmly believes it is useful, and the expectations finally self-fulfill, it will be really useful.

This is confidence.

The ending of "Let the Bullets Fly" is that everyone believes Huang Silang is dead, and they rush in with their weapons, then Huang Silang is really dead.

But this possibility is very small, and we can also confirm or refute this possibility from the data in a month or two, so there is no need to worry about missing out on the real estate market.

Postscript: This article introduces the harvesting techniques of the dollar tide, and why we are not affected by the dollar tide at the bottom logic.

But at the end of the article, I also want to say two points.

The first is that there are a lot of arbitrage opportunities, but they must be closed-loop.

Everyone can also appreciate this by Soros's method.

For example, in my public account article, the 2021 series on financial freedom told everyone how to use debt expansion techniques to make money that ordinary office workers can't earn in several lifetimes.

But this is also closed-loop in the end, and the closed-loop is to sell at the peak of the housing price cycle at the beginning of 2023 to cash out perfectly.

I specifically wrote an article to remind people when the housing prices in Beijing and Shanghai were at their peak last February.

"Buying a house to resist inflation, currency devaluation" are all harvesting rhetoric, which is to lure others to take over, and you must not believe it yourself.

The second is that any harvesting is based on certainty, and the research, identification, and prediction of certainty can all be done through data.

For example, the certainty of capital inflow after the US dollar interest rate cut is based on the closing of carry trade positions.

But it doesn't work here, and you can completely distinguish the facts through data.

We can see all the capital inflows and outflows through the balance of payments and the central bank's balance sheet.

That is, we judge from the logic that the return does not exist, and in the future, we can also verify from the data that the money really hasn't come in.

For the future, we can grasp all the trends by tracking the data.