Guotai Haitong: Be alert to the downgrading of the US dollar credit and the impact of energy, but technological progress leaves room for a soft landing.

Guotai Haitong released a research report stating that in the 1970s, the decoupling of the US dollar from gold led to a global downgrade in the credit of the paper currency system, coupled with the impact of the energy crisis, resulting in significant fluctuations in the prices of major asset classes. With the current reshaping of the global order, the credit of the US dollar benefiting from globalization is once again being challenged, and recent global energy shocks are also increasing. The similarity between the current situation in the United States and the 1970s lies in the "downgrade of paper currency credit" combined with energy shocks: the proportion of US dollar reserves is falling, Middle East conflicts are driving up oil prices, and with currency oversupply and fiscal expansion, there is a risk of inflation decoupling. However, the key differences are: the AI revolution has increased total factor productivity, shale oil has made the United States an exporter, and the weakening of union coverage rates and indexation of wages has reduced the rigidity of the "wage-price spiral" compared to the past. The lesson from Volcker is that policies need to demonstrate determination to rebuild credibility, but current technological advancements create space for a soft landing, and the Federal Reserve does not need to strictly follow the shock therapy approach; if US dollar credit continues to deteriorate, and inflation decouples, some experiences from the 1970s are worth considering. The main points of Guotai Haitong are as follows: In the 1970s, the decoupling of the US dollar from gold led to a global downgrade in the credit of the paper currency system, followed by the impact of the energy crisis, leading to significant fluctuations in the prices of major asset classes. The current reshaping of the global order has challenged the US dollar credit benefiting from globalization, and recent global energy shocks are increasing. We need to learn from the history of the 1970s to draw lessons from it. Tied to gold: the establishment and crisis of the US dollar hegemony. The Bretton Woods system established the international dominance of the US dollar through the "double tie" principle, but faced the "Triffin dilemma". After World War II, with the economic recovery of Western Europe and Japan, gold reserves continued to flow out of the United States. In the mid to late 1960s, the Vietnam War and the "Great Society" program led to a surge in US fiscal deficits and currency oversupply, ultimately making the Bretton Woods system unsustainable. In terms of asset performance, from 1945 to the mid-1960s, US dollar assets were strong and stable, with a strong stock market and stable exchange rates; in the mid to late 1960s, inflation increased, the Fed tightened monetary policy, real yields on U.S. debt turned negative, US stocks fluctuated weakly, and the US dollar faced increasing devaluation pressure. Tied to oil: the reshaping and stagflation of US dollar hegemony. After the collapse of the Bretton Woods system, the United States reshaped the US dollar hegemony by linking US dollar trade to oil transactions through the "oil dollars" agreements with countries such as Saudi Arabia. Oil-producing countries obtained US dollar surpluses by selling oil, which were then reinvested in US assets, providing the United States with low-cost financing. However, the two oil crises of the 1970s caused oil prices to soar, compounded by earlier currency oversupply, leading the United States into severe stagflation. In terms of asset performance, gold, freed from official price constraints, soared significantly, and commodity prices such as oil and Shenzhen Agricultural Power Group generally rose. The bond market entered a bear market, with yield curves inverting multiple times; the U.S. stock market as a whole weakened, experiencing a long period of valuation compression, with only the energy and raw materials sectors showing relative resistance. Volcker's fight against inflation: the defense of a strong US dollar. Faced with out-of-control inflation, Volcker took over the Federal Reserve in 1979 and implemented aggressive tightening policies, controlling the money supply and raising interest rates to record highs, at the cost of short-term recessions to break inflation expectations and rebuild the credibility of the Federal Reserve and the strong position of the US dollar. In terms of asset performance, in the early stages of tightening, the bond market experienced a sharp decline and yield curves inverted; the U.S. dollar strengthened due to high interest rates attracting capital. The stock market initially suppressed valuations and profits due to high interest rates, but after inflation receded and interest rates declined, profit recovery and valuation expansion resonated, initiating a long bull market in U.S. stocks. Commodity prices and gold plummeted as holding costs rose and the US dollar strengthened. Eventually, the bond market entered a bull market for decades, consolidating the strong position of the US dollar. Current US stagflation expectations: similarities and differences with the 1970s. The current similarity between the US and the 1970s lies in the "downgrade of paper currency credit" combined with energy shocks: the proportion of US dollar reserves is falling, Middle East conflicts are driving up oil prices, and with currency oversupply and fiscal expansion, there is a risk of inflation decoupling. However, the key differences are: the AI revolution has increased total factor productivity, shale oil has made the United States an exporter, and the weakening of union coverage rates and indexation of wages has reduced the rigidity of the "wage-price spiral" compared to the past. The lesson from Volcker is that policies need to demonstrate determination to rebuild credibility, but current technological advancements create space for a soft landing, and the Federal Reserve does not need to strictly follow the shock therapy approach; if US dollar credit continues to deteriorate, and inflation decouples, some experiences from the 1970s are worth considering. Risk warnings: escalation of geopolitical conflicts, increased global stagflation risks, unexpected tightening of monetary policy, etc.