4 ms·

I am sceptical that this is really bad for the stock market. Those 5% must come from somewhere. Either from a growing economy: Good for the stock market. Or

by mg 3y ago

I am sceptical that this is really bad for the stock market. Those 5% must come from somewhere. Either from a growing economy: Good for the stock market. Or from freshly printed money: Also good for the stock market. The "risk free" interest rate is not really risk free. You do not get back 2023 Dollars. You get back future Dollars, which are devalued by a currently unknown factor.

eatsyourtacos 3y ago
The bigger point is.. who the f cares? This obsession with the stock market is probably one of the worst inventions in human history.
- Supermancho 3y ago
  > The bigger point is.. who the f cares? Investment firms and other orgs with large amounts of money, seeking what they always seek. More money. As I understand it, banks invested heavily in bonds which give under 2% return, but because of the cheap 5% bonds, they can't even dump them to capitalize on the 5%, because nobody wants to buy the old 2%. https://www.youtube.com/watch?v=sixGjiYSxAk https://www.youtube.com/watch?v=sixGjiYSxAk
- sneed_chucker 3y ago
  Unfortunately the life savings and retirement plans of most of the world's middle class is tied up in it.
  - landemva 3y ago
    The world, or the US? Government pensions are widespead in Europe. And middle class USA savings is paying down their house mortgage.
    - sneed_chucker 3y ago
      What do you think government pensions are invested in?
      - landemva 3y ago
        Government bonds, so no need for obsession with stock market.
pid-1 3y ago
Why would anyone invest in stocks when they can have higher, lower risk returns by buying govt. bonds / investing in money markets?
nknealk 3y ago
In most financial models, the return investors demand on risky assets like stocks depends on the opportunity cost of the risk free rate [eg 1]. As the risk free rate goes up, the return investors expect on risky assets also goes up which pushes their price down. [1] https://www.investopedia.com/terms/c/capm.asp https://www.investopedia.com/terms/c/capm.asp
- mg 3y ago
  Yes. And I am questioning whether those models make sense. Maybe they are from before 2008 when printing money was considered a "slight background noise" and not a doubling every few years like we see now? https://fred.stlouisfed.org/series/BOGMBASE https://fred.stlouisfed.org/series/BOGMBASE
boringg 3y ago
It's bad for the stock market because the support for equity erodes as capital rotates out of equity and into T-bills & bonds. It also drives up the interest requirements on returns on capital thats loaned out to companies therefore compressing their margins, which in turn puts pressure on their equity. With less money to spend, businesses are more strategic in their capital spend (reducing B2B product purchases). It also should be mentioned that 5% is actually just above inflation so that yield is nominal and not actual returns. Inflation (Assuming at 3.7% going forward) that 5% is more like 1.3% real return on money. Worth reminding though the stock market IS NOT the economy.
dragontamer 3y ago
Have you studied the 1970s through 1980s? As bond rates increased, companies went bankrupt because they couldn't afford loans needed to sustain themselves. When the US Government is willing to pay 10%, 15%, or more on debt, that means that "normies" will have to pay 20% or 25% on mortgages or company credit. Companies who are used to 8% debt or normal people used to 5% mortgages will suddenly find 15% mortgages or 20%+ debt impossible to manage and go bankrupt. This cascades and hampers the economy. ---------------- Everyone complains about US Government debt while ignoring the fact that most people and companies are levered up the wazoo. You think US Government is bad? How much money is typical Silicon Valley company making, and how much is their debt load? Will (random-unicorn) be able to survive higher interest rates? Even the fear of others going bankrupt will cause banks to hoard money for themselves (too risky to lend it out to others), especially because cash now earns 5% to 6% safely. Why lend to risky companies who'll just go bankrupt when you can lend to US Government more safely?
- mg 3y ago
  You addressed my first point Either from a growing economy: Good for the stock market. By saying the economy might not grow. Fair enough. But you did not address my second point Or from freshly printed money: Also good for the stock market. Since 2008, the government has reacted to every problem by doubling, tripling, quadrupling the money supply. If we face a recession, won't it do that again? Then, the dollars you get back are worth less than the dollars you lent to the government. And assets that can't be printed - like companies - would go up in dollar value.
  - dragontamer 3y ago
    M2 has been in decline this year. There's fewer dollars today than there were last year. How does this factor into your model? Not only has interest rates spiked to 5%, but dollars are getting erased from existence.
    - deleted 3y ago
      [deleted]

by mg 3y ago

eatsyourtacos 3y ago

The bigger point is.. who the f cares? This obsession with the stock market is probably one of the worst inventions in human history.

Supermancho 3y ago
> The bigger point is.. who the f cares? Investment firms and other orgs with large amounts of money, seeking what they always seek. More money. As I understand it, banks invested heavily in bonds which give under 2% return, but because of the cheap 5% bonds, they can't even dump them to capitalize on the 5%, because nobody wants to buy the old 2%. https://www.youtube.com/watch?v=sixGjiYSxAk https://www.youtube.com/watch?v=sixGjiYSxAk
sneed_chucker 3y ago
Unfortunately the life savings and retirement plans of most of the world's middle class is tied up in it.
- landemva 3y ago
  The world, or the US? Government pensions are widespead in Europe. And middle class USA savings is paying down their house mortgage.
  - sneed_chucker 3y ago
    What do you think government pensions are invested in?
    - landemva 3y ago
      Government bonds, so no need for obsession with stock market.

pid-1 3y ago

Why would anyone invest in stocks when they can have higher, lower risk returns by buying govt. bonds / investing in money markets?

nknealk 3y ago

In most financial models, the return investors demand on risky assets like stocks depends on the opportunity cost of the risk free rate [eg 1]. As the risk free rate goes up, the return investors expect on risky assets also goes up which pushes their price down. [1] https://www.investopedia.com/terms/c/capm.asp https://www.investopedia.com/terms/c/capm.asp

mg 3y ago
Yes. And I am questioning whether those models make sense. Maybe they are from before 2008 when printing money was considered a "slight background noise" and not a doubling every few years like we see now? https://fred.stlouisfed.org/series/BOGMBASE https://fred.stlouisfed.org/series/BOGMBASE

boringg 3y ago

It's bad for the stock market because the support for equity erodes as capital rotates out of equity and into T-bills & bonds. It also drives up the interest requirements on returns on capital thats loaned out to companies therefore compressing their margins, which in turn puts pressure on their equity. With less money to spend, businesses are more strategic in their capital spend (reducing B2B product purchases). It also should be mentioned that 5% is actually just above inflation so that yield is nominal and not actual returns. Inflation (Assuming at 3.7% going forward) that 5% is more like 1.3% real return on money. Worth reminding though the stock market IS NOT the economy.

dragontamer 3y ago

Have you studied the 1970s through 1980s? As bond rates increased, companies went bankrupt because they couldn't afford loans needed to sustain themselves. When the US Government is willing to pay 10%, 15%, or more on debt, that means that "normies" will have to pay 20% or 25% on mortgages or company credit. Companies who are used to 8% debt or normal people used to 5% mortgages will suddenly find 15% mortgages or 20%+ debt impossible to manage and go bankrupt. This cascades and hampers the economy. ---------------- Everyone complains about US Government debt while ignoring the fact that most people and companies are levered up the wazoo. You think US Government is bad? How much money is typical Silicon Valley company making, and how much is their debt load? Will (random-unicorn) be able to survive higher interest rates? Even the fear of others going bankrupt will cause banks to hoard money for themselves (too risky to lend it out to others), especially because cash now earns 5% to 6% safely. Why lend to risky companies who'll just go bankrupt when you can lend to US Government more safely?

mg 3y ago
You addressed my first point Either from a growing economy: Good for the stock market. By saying the economy might not grow. Fair enough. But you did not address my second point Or from freshly printed money: Also good for the stock market. Since 2008, the government has reacted to every problem by doubling, tripling, quadrupling the money supply. If we face a recession, won't it do that again? Then, the dollars you get back are worth less than the dollars you lent to the government. And assets that can't be printed - like companies - would go up in dollar value.
- dragontamer 3y ago
  M2 has been in decline this year. There's fewer dollars today than there were last year. How does this factor into your model? Not only has interest rates spiked to 5%, but dollars are getting erased from existence.
  - deleted 3y ago
    [deleted]