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> But I really find the credit markets illuminate a lot, and I find a lot of traders and investors to ignore that. "Bonds are boring", so they think. They are a

> But I really find the credit markets illuminate a lot, and I find a lot of traders and investors to ignore that. "Bonds are boring", so they think. They are a leading indicator in stock in a variety of ways. You hit the nail on the head. Bond behavior changes systematic incentives in a variety of first order and second order ways. It's inevitable that it gets somehow refactored back into stock behavior as a second order effect. I guess the billion dollar word there is "somehow."

vmception 6y ago
The "somehow" is easy too. So, as the Central Banks in the major Western economies are prohibited from buying equity ownership, they generally do not buy stocks from companies^. They just buy bonds, mostly government bonds but when the utility of that diminishes they also buy corporate bonds. Either way, Central Bank actions distort the entire credit market, allowing any existing bond holder to sell to the central bank at a profit. it allows corporate bond issuers to create and sell to the distorted market, or directly to the central bank in both the primary and secondary market, at a profit. Note, when issuing bonds this is not called a profit, but let's be honest here, we are talking about writing on a sheet of paper that I will pay your $2,000,000,0000 back in 10 years at 0.75% a year. They frequently use new investor's money to pay back old investors. There is a word for that, but it dilutes my point. The accuracy of this reality doesn't change though. These sheets of paper are exchanged for money that did not exist prior to the moment of that transaction. The recipients buy stocks (and everything else). The corporate issuers buy back their own stock, give executives bonuses who make a diversified portfolio. The hedge fund issuers just amplify their own holdings with extremely cheap, non-margin callable leverage. ^Exceptions: Swiss National Bank buys US stocks with newly created francs. US Federal Reserve buys bond ETFs, in order to access the universe of bonds. Outside of the West, the People's Bank of China buys stocks directly. Predictable collective ownership philosophy.
- njarboe 6y ago
  There is no reason that the Central Banks can't be given the authority to buy stocks. You are also leaving out the Bank of Japan which has bought over $400 billion [1] during their "Great Stagnation". [1] https://finance.yahoo.com/news/boj-becomes-biggest-japan-stock-220000323.html https://finance.yahoo.com/news/boj-becomes-biggest-japan-sto...
  - vmception 6y ago
    Correct, and in the US Congress can alter the mandate. They have avoided it, specifically to avoid politicizing control of the money supply, and to keep private companies independent. It is part of the entire purpose of the Federal Reserve and its own independence. The pandemic stimulus laws have been the most climatic changes to the Federal Reserve directly in the 100 years of its existence. The unshackling and new mandate has had predictable results, some parts of Congress are aiming to re-shackle it and create more safeguards against the legislatures accessing it, but now it is politicized. The ability for the US to pay for anything is now completely tied to the market tolerance of more dollars on the market. The actual budget discussions have just been a sideshow to distract from this obvious source of funding.

vmception 6y ago

The "somehow" is easy too. So, as the Central Banks in the major Western economies are prohibited from buying equity ownership, they generally do not buy stocks from companies^. They just buy bonds, mostly government bonds but when the utility of that diminishes they also buy corporate bonds. Either way, Central Bank actions distort the entire credit market, allowing any existing bond holder to sell to the central bank at a profit. it allows corporate bond issuers to create and sell to the distorted market, or directly to the central bank in both the primary and secondary market, at a profit. Note, when issuing bonds this is not called a profit, but let's be honest here, we are talking about writing on a sheet of paper that I will pay your $2,000,000,0000 back in 10 years at 0.75% a year. They frequently use new investor's money to pay back old investors. There is a word for that, but it dilutes my point. The accuracy of this reality doesn't change though. These sheets of paper are exchanged for money that did not exist prior to the moment of that transaction. The recipients buy stocks (and everything else). The corporate issuers buy back their own stock, give executives bonuses who make a diversified portfolio. The hedge fund issuers just amplify their own holdings with extremely cheap, non-margin callable leverage. ^Exceptions: Swiss National Bank buys US stocks with newly created francs. US Federal Reserve buys bond ETFs, in order to access the universe of bonds. Outside of the West, the People's Bank of China buys stocks directly. Predictable collective ownership philosophy.

njarboe 6y ago
There is no reason that the Central Banks can't be given the authority to buy stocks. You are also leaving out the Bank of Japan which has bought over $400 billion [1] during their "Great Stagnation". [1] https://finance.yahoo.com/news/boj-becomes-biggest-japan-stock-220000323.html https://finance.yahoo.com/news/boj-becomes-biggest-japan-sto...
- vmception 6y ago
  Correct, and in the US Congress can alter the mandate. They have avoided it, specifically to avoid politicizing control of the money supply, and to keep private companies independent. It is part of the entire purpose of the Federal Reserve and its own independence. The pandemic stimulus laws have been the most climatic changes to the Federal Reserve directly in the 100 years of its existence. The unshackling and new mandate has had predictable results, some parts of Congress are aiming to re-shackle it and create more safeguards against the legislatures accessing it, but now it is politicized. The ability for the US to pay for anything is now completely tied to the market tolerance of more dollars on the market. The actual budget discussions have just been a sideshow to distract from this obvious source of funding.