Developing countries use inflation to undermine their debt ..eg India ...regular inflation of over 6-7 % ...huge debt ..rates are always high but stock markets keep doing super well as GDP keeps growing in nominal and real terms ...growth takes precedence and value of historical debt keeps falling thus keeps becoming more manageable .
From stocks perspective ....Inflation helps increase eps thus SP ...also stocks benefit from replacement cost analysis ...only from DCF valuation angle higher rates hurt stocks ....but if companies can increase revenues , which is easier if prices going up , then nominal EPS goes up thus increasing SP .
Inflation is a tool to handle high debt but in developed world it hurts the poor people most thus a very unpopular and tough choice .
We do have problem of high debt in developed world now so Central Banks need to choose between growth or inflation and also debt Service burden of future ...which may become unsustainable at higher rates and longer term without growth and inflation
IMO ...path of growth and higher inflation then before is the easiest and soundest way out of huge Govt debts of developed world accumulated over last 10 years ...so super high rates which many are predicting to bring inflation down to previously normal levels may not happen .
Best approach , to stay in productive assets as they will also inflate with general economy while cash or similar assets will depreciate to accomodate huge historical debt servicing
Longer to medium term see no benefit of going out of stocks
If asset prices really were the inverse of interest rates then the value of the bond proxies should have halved by now.
Is it because the interest rates were so ridiculously low, will the bond proxies get smashed once interest rates rise above dividend yields perhaps.
For a lot of the bond proxies like Vector debt at $2,838.3mill a 1% rise in funding equals $28.3 extra in interest payable. With a declared profit of $194.6mill that is a not too insignificant rise in one of its main costs. Imagine if rates were to rise by 3% Vectors profit might halve. Bond holders would still get paid but the dividend might be in danger.
I assume no one believes central banks will genuinely fight inflation with higher rates.
If asset prices really were the inverse of interest rates then the value of the bond proxies should have halved by now.
Is it because the interest rates were so ridiculously low, will the bond proxies get smashed once interest rates rise above dividend yields perhaps.
For a lot of the bond proxies like Vector debt at $2,838.3mill a 1% rise in funding equals $28.3 extra in interest payable. With a declared profit of $194.6mill that is a not too insignificant rise in one of its main costs. Imagine if rates were to rise by 3% Vectors profit might halve. Bond holders would still get paid but the dividend might be in danger.
I assume no one believes central banks will genuinely fight inflation with higher rates.
Thanks for that, flicking through the different time periods the 1yr rate is interesting with people happy to lend for a year at 0% up to October 2021 now it is 2.5%. I guess the 0% might have been Orr buying govt bonds to suppress interest rates. Not sure that could be fake news but I understand central banks print money to buy govt bonds at low yields for the short term to influence rates in the long term.
Pretty extreme moves but not reflected on the NZX as yet. I don't think Adrian Orr has the courage to act and obviously I am not the only person who thinks that.
Either that and/or the financial advisors have sold the buy and hold for the long term narrative. They forget to mention their fees are also dependent on how much you have invested with them. They win up or down and only lose if you move money to the sidelines.
Last edited by Aaron; 08-04-2022 at 05:11 PM.
Reason: inappropriate language for a public forum
Even Jeremy admits he is usually a few years early.
Talk to clearasmud as he has a strong conviction on which year it all turns to custard and based on Jeremy's previous early calls he may be right. I guess that is why they say forecasting the future is as clear as mud.
Reply With Quote
Originally Posted by bull....
Bookmarks