Life Veda

Investment Analysis, Market Insights, and Trading Strategies

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Macroeconomic Analysis: Market Trends and Currency Flows

The Gresham’s Law in Modern Markets

The true interpretation of Gresham’s Law states that when two currencies are freely convertible, people tend to hoard the more valuable currency and use the less valuable one for transactions. This principle extends to investment decisions: investors typically use the currency they consider more valuable for investments and the less valuable one for consumption.

Based on our theory, when two currencies have widely known real values that differ from their current exchange rates, or when hoarding has no value, a long-term currency flow trend emerges. These trends typically only change due to major events. For example, after the 2000 internet bubble burst, Chinese stock markets experienced a prolonged period of capital inflow, starting from Hong Kong and spreading to mainland China.

China Mobile

As shown in the chart above, China Mobile rose 10-fold from 2003 to 2007, a high that hasn’t been surpassed since.

China Life Insurance

China Life Insurance also experienced a 10-fold increase and hasn’t reached those levels in nearly 18 years.

These events can be attributed to changes in long-term currency trends. Before 2007, massive capital inflows into Chinese markets were followed by a significant stock market divergence.

Currently, we can observe global capital flowing into the United States, similar to the pre-internet bubble period, with the US leading in AI development and investment. The global economy is struggling, which we can trace back to Bernanke’s policies before 2014. Through unconventional measures, he successfully led the US out of deflation, making it the only country in modern fiat currency history to achieve this. This has led to long-term capital outflows from other regions, including Europe and Asia, potentially accelerating their long-term deflationary pressures.

The modern monetary system is relatively new, and it’s now facing additional challenges with declining birth rates in major wealthy nations. While we won’t discuss deflation in detail here, our focus remains on currency flow trends.

What Drives Stock Price Increases: Earnings or Currency Flows?

Recent years have provided a clear answer: when performance is exceptional, stocks can achieve extraordinary gains even in high-interest rate environments, as demonstrated by the US Big 7. This wasn’t typically an issue in the manufacturing era because manufacturing was highly capital-dependent, and high interest rates would erode corporate profits. It was difficult for companies to maintain high sustained profits in high-interest rate environments while relying on capital. However, in the Big 7 era, this dynamic has changed. These companies generate massive cash flows while requiring minimal new investment, allowing them to maintain high growth even in high-interest rate environments.

Market Analysis

Investment Strategy

Stock Analysis

US Stocks

Chinese Stocks

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