The Wall Street continues to dance on the edge of a heating volcano. Increasing interest rates in the USA and the world pose a serious risk for the stock market. No one seems to have noticed.
Hmmm. Do you feel lucky?
The question encountered by investors dealing with their pension funds is an ominous question: How long can this take? Especially the huge federal deficits and in front of a stock market that is almost so expensive.
While the headlines in Jackson Hole are about Federal Reserve President Jerome Powell’s Pivoti, which appears to lower short -term ratios, the participants say that a greater speech in the Confabis of the Central Bank is a long -term concern walking here and around the world.
30-year-old Japanese government bond BX: The yield in TMBMKJP-30YY is currently 3.2%. This is almost 10 times – yes, really – the rate of 0.35%in the beginning of 2019. Long-term British Treasury Bonds BX: TMBMKGB-30Y, known as Gilds, has reached its highest levels since 1998. The rates are higher throughout the Board.
And then, the most ominous, United States.
The latest job data shows that the economy is slowing down sharply. The data was so bad that President Donald Trump fired the person who compiled the numbers. Powell pointed out that the Fed was open to cutting short -term rates at the next month meeting. And long -term bond return? With the people of the world’s rest, he rises, does not fall. With 4.9%, the 30 -year bond BX: TMUBMUSD30Y yield is higher than just a few weeks ago and is much higher than a year ago when it was only 4.1%.
Powell, economists and investors already know that the FED does not control long -term interest rates, not only short -term interest rates. Wait until Trump learns.
There is no great mystery for this. Interest rates are increasing because governments in the world are conducting great deficits every month. They need to borrow this money from somewhere and they need to raise the interest rate to the lenders of Woo.
Thinking: The United States government is currently lending $ 160 billion per month, which is an amazing and absurd amount that challenges human understanding. Maybe this will do more: This American house works up to about $ 1,200 per. Monthly. Oh, and don’t worry: Thanks to a great beautiful Bill law, it is expected to rise to $ 1,400 per month next year.
As Lieutenant Frank Drebin from “Police Squad ği was declared in front of a explosion of fireworks: There is nothing to see here, the nation. Please mountain.
It is not surprising that investors’ stigmatization from the US dollar and to almost everything, from Gold to Dogecoin.
Unfortunately, despite the best protests of many financial groups, the stock market is not isolated from the bond market. The money you borrow to Uncle Sam, the money you can’t invest in the stock market. The main purpose of higher proportions is to convince investors to borrow money to the government rather than doing something else, such as buying stocks.
Mathematics as usual. The interest rate in long -term treasury bonds is four times the dividend return in the stock market, ie bonds will pay you four times the income.
Albert Edwards, President of the Global Strategy of the Investment Bank SG Securities, says this is the highest in the quarter century.
It is difficult to believe, but at some point during the pandemi, the dividend yield in the market was actually higher than the coupon yield in long -term bonds.
The bonds paid you four times more money for the last time. What happened then? Stocks fell to about half. (Bonds also rose.)
If you rely on inflation data from the Bureau of Statistics Maled with the New MAG, you can earn more than long -term treasury inflation -protected securities or tips. They pay a basic setting that will match with plus inflation up to 2.6% per year, which is currently officially 2.7% per year. However, be confused if this official ratio collapses towards the so -called 0% announced by Trump in a short time.
Edwards writes: “We can definitely accept that increasing bond returns will break the equity market at some point? But when?”
Okay, comparing stocks and bonds is not an excellent apple-elm comparison. Stocks and dividends are just part of the story. Companies also create value for shareholders by spending money again by re -investing in stock procurement and enterprise. And while the stock dividends typically rise over time, the coupons on the nominal bonds are fixed (what is in the clues rise, but only with inflation).
But it’s still a useful criterion. Anyway, the US stock exchange is now traded in the estimation of earnings per share about 24 times, or if to express the same thing differently, it offers a yield of earnings just above 4%.
In other words, even the full income return on stocks-not only dividends, but all the net income, is significantly less than the coupon return in the futures bonds.
The US large company stocks have never been so expensive. In the last decade, the Long Wall Street explosion has been said to have greatly desperately desperate low bond returns. Wall Street is now to say that bond returns are very, much higher and the stocks are even more expensive?
Here is a clue. A leading economic expert, a professor from Yale, spoke from a stock market balloon, despite his speaking, the market will not collapse. On the contrary, he says he has reached a permanently high plateau. And some opponents are openly worried about the so -called supreme values, while ordinary investors should not worry. These high values are completely right with increasing institutional gains. “The stock market expects to see something higher than today” in a few months. “
Bad news? As Edwards points to its customers – Contemporary New York Times article – These statements are not new. It was held on October 16, 1929 by Yale Economy Professor Irving Fisher.
