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Last night, the Federal Reserve made headlines by slashing interest rates by an unexpected 50 basis points, a move that exceeded the expectations of many analysts and market watchers. If you are trying to decipher the implications of this decision on global financial markets while following Fed Chairman Jerome Powell’s statements, you might find yourself led astray.

The truth is, inflation rates and employment statistics are not the principal drivers behind the Fed’s decision to lower interest rates. Instead, the Fed and the U.S. Treasury are likely privy to confidential risk data that is not available to the public, an insight that raises prescient questions about the underlying stability of the American economy.

What, then, are the risk factors affecting the U.S. economy? And how will this impact the trajectories of both the stock and real estate markets in China?

The Shattered Facade of American Banking

In the past 35 years, the Fed has only resorted to a 50 basis point cut in benchmark interest rates three times during moments of economic turmoil. These significant historical instances occurred: during the burst of the dot-com bubble in 2000, in the wake of the subprime mortgage crisis that began in 2007, and amid the global onslaught of the COVID-19 pandemic in 2020. Each of these are profound crises that reshaped the landscape of global finance.

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After the Fed's announcement last night, there was a brief surge of optimism that sent the S&P 500 to a record high of 5,641.68 points. However, as the reality of a recession set in, the market quickly reversed course, culminating in a drop of 16.32 basis points - a stark reminder of the precarious state of economic affairs.

On September 19, the Wall Street Journal underscored a troubling narrative, stating that regardless of whether Trump or Harris assumes the presidency, the surge in U.S. federal debt is set to escalate, with the printing of money expected to increase, leading to even higher inflation rates.

In simpler terms, it appears that the Treasury requires significantly more financial resources to stave off a looming economic collapse.

The current risks faced by the U.S. economy do not stem primarily from the stock market or Treasury bonds, but rather from the escalating crisis within the American banking sector. A debacle that has proliferated beyond containment.

According to the most recent data disclosed by U.S. authorities, by the end of 2023, Goldman Sachs, JPMorgan Chase, Citigroup, and Bank of America collectively hold an astounding $168 trillion in derivatives.

This figure accounts for a staggering 87% of all financial institutions covered by federal insurance, a statistic that is as alarming as it is significant.

In the wake of the tech bubble collapse in 2002, then-President George W. Bush narrated a new American Dream to the world. Within this grand illusion, the U.S. financial and real estate sectors soared to unprecedented heights side by side.

However, after a dramatic 6-year ascent, U.S. housing prices plummeted into the subprime mortgage crisis. Leading up to this calamity, financial giants like Lehman Brothers and Fannie Mae had discreetly communicated with Treasury Secretary Hank Paulson, urging major U.S. banks to assume their toxic assets.

Ultimately, Goldman managed to rescue Fannie Mae and Freddie Mac through a $30 billion government guarantee, while Lehman was not so fortunate.

Additionally, at that time, China and Russia were heavily invested in securities linked to Fannie Mae and Freddie Mac and were poised to divest their holdings. Once Treasury Secretary Paulson received word of this impending sell-off, he promptly flew to China for urgent negotiations, reiterating the commitment of the United States to ensure the safety of Chinese investments while offering ample incentives. This effort prevented the subprime crisis from spiraling out of control.

Are we now facing a scenario reminiscent of that turbulent period in 2024?

Could a 100 basis point rate cut be on the table this year?

At present, the most vulnerable aspect of the American economy lies not in the stock market or Treasury bonds but squarely within its banking sector, which serves as America’s largest creditor.

Reports from Economic Daily suggest that as of September, Warren Buffett had reduced his stake in U.S. bank stocks below the 10% threshold. This means Buffett is no longer required to disclose trades within a two-day window and can instead announce any changes quarterly.

This situation implies that if Buffett were to liquidate his bank stock holdings, the market would not be informed for three months—a situation that poses a genuine threat to uninformed investors.

A glance at the stock performance of U.S. banks reveals that between August and September, many institutions experienced sudden acute declines in stock prices. Even industry stalwarts like Goldman Sachs and JPMorgan failed to evade this downturn.

It was only through the intervention of undisclosed forces that the market managed to stabilize.

Besides Buffett, gold prices have emerged as a crucial risk indicator worldwide; they have surged by 25% this year alone.

In a bid for safety, international capital is stockpiling gold bars to shield their assets from the impending economic storm.

In light of these risks, bankers are acutely aware of the seriousness of the situation. They are not waiting for a savior to save the economy; instead, they are seeking avenues to protect their interests.

Given these pressures, the Federal Reserve cannot afford to be concerned about creating chaos for another major economy in the East, as their own ship is perilously close to sinking.

For the Fed, the immediate priority is to address the crisis within the U.S. banking sector, leaving the question of whether lowering rates can reignite the Chinese economy a secondary consideration.

Will $14 trillion flow back to China?

According to a recent research commentary from JPMorgan, data reveals that after each of the previous five rate hike cycles since 1988, emerging market stocks have shown markedly positive performance two years following Fed rate cuts, averaging returns of 29%, outperforming developed markets by 17 percentage points.

As reported by Bloomberg, Chinese enterprises have accumulated $2 trillion in overseas investments which are poised to gradually return to China following the Fed’s easing.

This influx is undoubtedly positive for assets valued in Renminbi, yet it introduces pressure for appreciation of the currency.

However, it raises pressing questions: Has the Chinese real estate market lost its financial attributes? Can it still benefit from Fed rate cuts as it has in the past?

The answer remains shrouded in uncertainty, as the current challenges faced by China's real estate market are complex. On one hand, diminishing population dynamics are leading to soaring vacancy rates in new housing. On the other hand, there is intense pressure to de-financialize the real estate sector as part of broader economic structural adjustments.

The real estate sector in China is grappling not only with financial challenges but also significant political and confidence-related pressures.

In summary, as we reflect on the transition from the Fed's rate hike cycle to the current rate-cutting period, it is evident that the trade and financial wars are winding down, ushering in a phase of renewed strategic competition between the U.S. and China.