Bonds, equities and the ECB

Hawkeye123

If investors believe interest rates will fall, they pile into equities. If they believe interest rates will rise, they pile into bonds.

The ECB is aware of this.

So, if the ECB is worried about a possible stock market crash, they say they are going to lower interest rates. And, if the ECB is worried that the fear of inflation will deter investors from investing in bonds, they say they are going to increase interest rates, in order to beat inflation.

But, what happens if the ECB is worried about a run on both bonds and equities? I think in that scenario, the ECB would do what it is doing now. It gives mixed messages, trying to reassure investors in both equities and bonds. This is causing confusion now and nobody really knows what the ECB will do. The ECB doesn`t know either because it doesn`t know what investors are going to do but it is looking at the "data" to see who is more scared. And they try to reassure the most frightened with words.

They know if they actually lower interest rates, it will worsen both inflation and bond sales. Maintaining or raising interest rates while saying wage demands must fall will cause industrial unrest, bankruptcies, mortgage defaults, business failures, unemployment and so on.

Cutting public spending would help but they don`t want to do that. But what I really want to say is this: when the ecb says something, it is because they want to reassure either bond or equity investors depending on whether they say they will move interest rates up or down.

Mach 3

The ECB is not responsible if the stock market crashes, there are many more external variables than interest rates rising or falling.

Are you searching for the right question to ask?

https://www.ecb.europa.eu/services/ask_us/html/index.en.html#:~:text=About%20the%20ECB,-What%20is%20the

"Our main objective is to maintain stable prices, and the main way that we do this is by setting appropriate interest rates. We are also responsible for supervising banks within the framework of the Single Supervisory Mechanism (SSM)."

Hawkeye123

You have contradicted yourself. The ECB's objective is also their mandate. The reason they exist is to maintain stable prices (although free marketeers would prefer the free market was left unmanipulated.)

Obviously if the equity markets crashed, that would be instability.

Pumping a trillion euro into existence helped inflate equities. If the equity investors get the notion they are being strung along by the ECB or if they decide to sell for any other reason, all that inflation will come out of equities and go elsewhere.

But you know, I think if it were to happen, the FED would ultimately choose monitization and let inflation take off. The ECB may choose to save the bond market instead, because if it doesn't, the Eurozone may break apart. Come to think of it, that could happen in either case.

Final point, I am less anti Trump than I am anti Biden. A Trump victory could see a more multinationals leave Ireland for the US. That would actually benefit Ireland from a price discovery point of view. Especially if it devastated the government's finances as their ability to manipulate the housing market would be undermined.

dxhound2005

New Euro banknotes coming. They must be confident about the future.

https://www.ecb.europa.eu/euro/banknotes/future_banknotes/html/index.en.html

Mach 3

Are you invested in Equities or Bonds?

Hawkeye123

https://www.boards.ie/discussion/comment/121750761#Comment_121750761

The issuances of new banknotes (either new design or same ol` stuff) is a feature of an unstable currency.

daheff

https://www.boards.ie/discussion/comment/121750089#Comment_121750089

Their objective is stable prices. That does not equate to Equity prices. Their objective relates to prices of goods & services.

Hawkeye123

https://www.boards.ie/discussion/comment/121751665#Comment_121751665

Neither. Holding a lot of cash is also not a good idea. I think in about 18 months to 2 years, Chinese equities will be set for long term, real organic growth that will not require stimulus by the Bank of China. Commodoties are worth owning as are equities in economies that value commodoties over central bank stimulus measures. Gold and gold indices are also interesting. One of the things that puts me off a lot of investments is the counterparty risk. Also, the fact that share certs are not very forthcoming is a major exposure to counter party risk. Also capital gains tax is too high and can be increased at the whim of a government.

I know the government does not want property prices to fall, so it will be interesting when they do. The flatlining of interest rates at zero, a few years ago was the death knell. The next stimulus would have to go deep into negative territory or see a surge in QE. The only reason equities are at a high is because the central banks say interest rate cuts are on the way. That spooked the bond investors so the central banks are backtracking but the equity investors are still waiting for the interest rate cuts. I wonder how long they will wait.

Wanderer78

cutting public spending wouldnt help at all, it would clearly far worsen Europe as a whole, we re now experiencing this europe wide since the austerity periods, with serious social problems including housing and health care issues, again, europe wide....

Hawkeye123

https://www.boards.ie/discussion/comment/121756990#Comment_121756990

Most people would probably agree with you. This is why it is all down to the ECB. If they cut rates, bonds markets and inflation will get worse. If they don`t, equities will be impacted, as will defaults, unemployment etc

Wanderer78

https://www.boards.ie/discussion/comment/121757078#Comment_121757078

yea we re in a bind, but thankfully theres a slow acceptance that austerity truly is a dreadful idea, it always has been, but you d be very surprised how quickly we turn back to it, theres also still very little acceptance that our recent inflation is largely supply side, meaning central banks effectively cant do much about it, and if they continue with raising rates, or return to it, they ll trigger something far more serious, of which could be completely out of their control....

Hawkeye123

One thing I would add tho. If you oppose austerity like most people do, you are on the side of the equity investor over the bond investor. In other words, you prefer lower interest rates.

Mach 3

https://www.boards.ie/discussion/comment/121756914#Comment_121756914

I struggled a bit to put together all of your ramblings, but based on your own assumptions of owning commodoties - this means inflation will remain - this means intrest cuts are slow - this means no need for austerity - this means government intervention (public spending) - this means raising money through bonds.

So if the ECB stays slow/neutral, how is debt going to impact the market?

Hawkeye123

https://www.boards.ie/discussion/comment/121790447#Comment_121790447

I think you will see for yourself before the year is out.

Mach 3

https://www.boards.ie/discussion/comment/121805243#Comment_121805243

Excuse me?

With all of the above ramblings - is this the best you can come with up?

By the way - you forgot to mention forex Implications to any moves by the ECB (or any other central bank for that matter) and the effects (of forex - by other central banks) on the Three asset classes you did manage to mention.

For those interested this was a great week (take note of the movements of assets classes next week) to observe the media talking heads and what happens over the next few weeks.

Hawkeye123

https://www.boards.ie/discussion/comment/121867817#Comment_121867817

Yes it looks like the central banks are going to give up on inflation. Of course they hinted at that before and people piled in to the stock market. Then the central banks started saying maybe no rate cuts for a while.

So could this be the central banks crying wolf for the second time or do they really mean it this time?

Even if they keep crying wolf, the ability of investors who believe them to add to the investments they made the last time the central banks cried wolf, will be smaller because those who have not given up waiting are already invested.

Mach 3

A Car bought 15 years ago has doubled in price for the same version - has wages doubled in the last 15 years?

If you were on 40k 15 years ago are you getting 80k now?

If you were on minimum wage 15 years ago has it doubled?

Check the prices of asset classes 15 years ago.

Can new entrants to the work force expect to buy a home in 15 years?

The social unrest that is coming in the next year or two is frightening central banks and governments alike.

Geuze

Have new car prices have doubled in 15 years?

I have SKODA price lists. I will check.

17.04.2007

Middle spec= 19,605

March 2022

The basic model has 110hp, compared to 80 bhp fifteen years ago. Price is 27,295

49.5% increase. Jesus Wept.

How is a working person expected to manage?