Why Stock Market Must Rise!

01

In the past half month, the stock market has been quite magical, first calling for a charge, and then almost wanting to eat feces! The whole network is in a state of schizophrenia, and the 10 years of heartache that old stock investors have gone through have been experienced by new leeks in just a few days.

But after calming down, we still have to ask ourselves a few questions: Can the surge in the stock market pull us out of the economic predicament? Can the wealth of passing the hot potato drive consumption? Does the rise in corporate stock prices mean that the real economic environment has improved?

The current stock market has obviously exceeded the normal range of understanding. Without the support of the real economy, how long can this national charge last?

According to the wealth effect theory, the prosperity of the stock market can promote the increase of personal wealth, enhance consumption ability, and thus drive domestic demand.

Translated, it means that everyone dares to take loans to buy houses and consume in advance because they see the numbers in their stock accounts increasing every day. Companies can expand production and upgrade technology because the financing cost is reduced, thus forming a positive feedback and driving the real economy, solving the current problem that everyone has no money and dare not spend.

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Logically, there is no problem, but it may not be so simple in practice.

The first question is whether retail investors can make money?Based on data from the past decade, in our large A-share market, retail investors make money by probability, and widespread losses are the general norm for most people. For instance, during the first half of 2015, the stock market experienced a significant bull market, with institutions reaping substantial profits and an average annual return rate of over 40%, while retail investors barely made a profit, with an average annual return rate of only about 18%. However, in the second half of the year, the market conditions changed dramatically, and after a cycle of bull and bear market shifts, approximately 70% of retail investors incurred losses. Many people chased high prices during market volatility and sold at low prices, resulting in average losses exceeding 30%.

In 2021, after a brief market adjustment, liquor stocks and some technology stocks performed exceptionally well, and institutions made a fortune. However, the loss rate among retail investors remained above 55%. Historical data tells us that Chinese retail investors have long been at a disadvantage against institutions. They lack advantages in information, trading strategies, and emotional management. When the market falls, they panic and sell at a loss; when the market rebounds, they chase high prices again. Although a bull market can bring short-term profits, the vast majority of people still cannot escape the fate of being "mowed down like leeks."

For Chinese retail investors, making money in the stock market is a beautiful wish, and the idea of defying the heavens and changing one's destiny only exists in self-media jokes. The current stock market rise stems from strong policy stimulation, to put it bluntly, it encourages enterprises and institutions to increase leverage. Although rationality was later emphasized, anyone who has experienced a stock market crash knows that high leverage means high risk. Because market sentiment is unstable, once it turns or retraces, high leverage funds will be wiped out, ultimately leading to a massive sell-off of stocks. The bubble burst in 2015 was not that long ago; it can only be said that the lessons were severe, but the memory is short.Additionally, the rise in the stock market can lead to an increase in wealth for some investors, but this growth is not evenly distributed.

Most of those who can afford to invest a substantial amount in the stock market are from the middle to high-income groups. Ordinary families either have low participation or have been beaten by the stock market, leaving them with lingering fears and a lack of strength to engage further.

Thus, while policies may pull the stock market upwards, helping the real economy, the extent of this help remains questionable. If the appreciation of assets does not trickle down to the general public, consumption will not rise, and production capacity will still not be fully utilized.

Globally, there are countries that have tried to revitalize their economies by boosting the stock market, but few have been successful.

Let's take the more familiar examples of Japan and the United States.

After the collapse of the Japanese stock market bubble in the 1990s, asset prices also plummeted. Over a decade, the Nikkei index fell by 51%, and Tokyo's housing prices dropped by more than 60%. Since the Japanese banking system had a large number of loans tied to the stock market and real estate, the burst of the bubble shattered the financial system.

In the following thirty years, Japan has been paying off its debts.

Although the Bank of Japan significantly reduced interest rates, even approaching zero, in the hope of stimulating economic growth by lowering the cost of borrowing, both businesses and households were frightened by high leverage. Even when they had money, they used it to pay off debts first and were always hesitant to expand investment and consumption.Until 2013, under the guidance of "Abenomics," the Bank of Japan initiated a large-scale quantitative easing policy, which involved unlimited money printing to maintain social inflation at over 2%. Additionally, the government was permitted to purchase stock ETFs, allowing it to use the excess currency to buy specific stocks, bonds, commodities, or other core programs in a basket.

This practice began as early as October 2010 with an initial cap of 450 billion yen, which then steadily increased to 6 trillion yen. In 2020, the purchase limit was doubled, significantly raising it to 12 trillion yen.

Today, the Bank of Japan holds approximately 37 trillion yen in Japanese stock ETFs, accounting for 4.3% of the total market capitalization on the Tokyo Stock Exchange. The Bank of Japan is not only the largest single buyer in the Japanese stock market but also one of the major shareholders in nearly 40% of Japanese listed companies.

Although after 2021, the Bank of Japan began to reduce its purchases of stock ETFs, its decade-long continuous buying has laid the foundation for a potential explosion in the Japanese stock market.

To some extent, the surge in the Japanese stock market in 2023 can be attributed to government speculation.

However, it is important to note that even if the Japanese stock market rises and surpasses the peak of the bubble in the 1990s, it has not stimulated the domestic real economy. Over the past few years, due to trade deficits and currency devaluation, Japan's GDP has significantly decreased when calculated in US dollars, and even when calculated in yen, the real growth rate is only around 1%.

The reason is not complicated: the rise in the stock market has not addressed the structural issues in the real economy, such as an aging population, difficulties in industrial upgrading, and long-term stagnation in productivity.

Japan has been living off its past achievements, and the basis for the rise in the stock market is still built on the model of unlimited money printing at low interest rates. Once the money supply is stopped, the economy will likely return to a state of suspended animation, rendering decades of work in vain.In comparison, the United States' actions in 2008 were much more effective than Japan's.

It is well-known that the subprime mortgage crisis in 2008 triggered a historic collapse of the U.S. stock market, with the S&P 500 falling by half, housing prices dropping by one-third, numerous banks going bankrupt, and the unemployment rate reaching a new high in nearly two decades, soaring above 10%.

The Federal Reserve's playbook was not novel; it began with three rounds of quantitative easing, injecting trillions of dollars in liquidity into the market, which quickly inflated asset prices.

Additionally, they reduced borrowing costs and directly stimulated domestic consumption by distributing money to the public.

Of course, we and Japan also absorbed a massive amount of dollars, stabilizing U.S. inflation.

After a series of maneuvers, the S&P 500 bottomed out in 2009 and then began a decade-long rise, reaching nearly 3000 by 2019, with an increase of over 350%. The U.S. GDP growth rate also recovered from negative to a stable level of 2%-3% annually.

The U.S. economy was able to quickly bounce back from the subprime mortgage crisis, partly because the government could print money without limits to directly and forcefully drive up asset prices. However, the more critical factor was the transformation of the industrial structure, with a large number of technology innovation companies rapidly emerging under strong policy and funding incentives.

For example, tech giants represented by Facebook, Apple, Amazon, Netflix, and Google became the leaders of the U.S. stock market after 2009. They not only changed the global business model but also significantly improved the production efficiency of the U.S. manufacturing and service industries through technological innovation.By the end of 2020, the market value of these companies approached 7 trillion, accounting for 25% of the S&P 500 index. It's as if monetary policy has propelled the stock market, and the growth of technology companies, in turn, has driven the self-optimization of the socio-economic structure.

Once a positive feedback loop is established, and confidence is regained, economic issues and industrial upgrades can be tackled head-on without hesitation.

Upon closer examination, the logic becomes clearer.

If we were to simply copy Japan's approach, where stock appreciation leads to a celebration for the wealthy, the assets of ordinary families would struggle to keep pace. In turn, they would have to bear the pain of low interest rates, currency devaluation, and high inflation.

Therefore, this round of strong stimulus is not only about driving the stock market but, more crucially, about reducing corporate financing costs and encouraging technological innovation in tech companies. Only when the stock market is effectively connected with the real economy can we overcome the threshold of overcapacity and consumption downgrade.

Neither stock market booms nor crashes are what the country desires; only a stable increase can ensure a fair distribution of wealth. In other words, retail investors can only make money in a predictable market, much like the real estate market a decade ago. When most people believed that housing prices would only rise and not fall, the wealth effect could be realized.

This transformation requires time to accumulate, but as long as one understands this point, they can grasp how to make choices for the future.