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New Fed Put Levels (Update: June 2020)
17 June 2020 at 11:57
In the 20th century, financial investment was a complex and serious topic.
You had to choose your mix of bonds of various maturities and risk levels - all associated with a very broad range of rates.
Similarly, you could build your mix of stocks (value vs. growth) or replicate more or less an index.
There was this thing called "free market". Good or bad - this is not the question. Perhaps it was just to show to the "Reds" that this notion of "free markets" was working so much better.
Now, things are much simpler. After a series of crises (dotcom, subprimes, Euro zone, and recently, the covid-19) the central banks have been more or less forced to set interest rates to zero or less, and frequently launch new programs for monetizing bonds and other financial assets. Governments take the opportunity of low interest rates and monetization not to balance their budget, but to increase their debts to the infinity. Same for corporations and even individuals. Zero rate = infinite leverage. Easy.
So, presently, all is simple. Bonds are a nonsensical business for investors - except those who are obliged to buy them, like insurances. Regarding stocks, old-school valuations like P/E ratios, or book value, or dividends, or credit rating of the underlying company, do not matter anymore: the Fed or the ECB will buy everything, even junk bonds. A funny consequence is that stock of bankrupt companies like Hertz are doing well, and the same Hertz is now selling new shares while under Chapter 11. Perhaps they will sell enough to balance their books, who knows!
Since the Fed's latest emergency plan a couple of days ago, we know what are the current approximate, implicit levels at which the Fed will do something more to support the financial markets.
Trade accordingly!
__
PS: The parts of the charts' data prior to 2020 was automatically digitized by the Recurve tool (part of the open-sourceย Generic Image Decoder project in Ada).
PPS: here a "meme" about the subject:
You had to choose your mix of bonds of various maturities and risk levels - all associated with a very broad range of rates.
Similarly, you could build your mix of stocks (value vs. growth) or replicate more or less an index.
There was this thing called "free market". Good or bad - this is not the question. Perhaps it was just to show to the "Reds" that this notion of "free markets" was working so much better.
Now, things are much simpler. After a series of crises (dotcom, subprimes, Euro zone, and recently, the covid-19) the central banks have been more or less forced to set interest rates to zero or less, and frequently launch new programs for monetizing bonds and other financial assets. Governments take the opportunity of low interest rates and monetization not to balance their budget, but to increase their debts to the infinity. Same for corporations and even individuals. Zero rate = infinite leverage. Easy.
So, presently, all is simple. Bonds are a nonsensical business for investors - except those who are obliged to buy them, like insurances. Regarding stocks, old-school valuations like P/E ratios, or book value, or dividends, or credit rating of the underlying company, do not matter anymore: the Fed or the ECB will buy everything, even junk bonds. A funny consequence is that stock of bankrupt companies like Hertz are doing well, and the same Hertz is now selling new shares while under Chapter 11. Perhaps they will sell enough to balance their books, who knows!
Since the Fed's latest emergency plan a couple of days ago, we know what are the current approximate, implicit levels at which the Fed will do something more to support the financial markets.
Trade accordingly!
__
PS: The parts of the charts' data prior to 2020 was automatically digitized by the Recurve tool (part of the open-sourceย Generic Image Decoder project in Ada).
PPS: here a "meme" about the subject:
