But how about this for an asset price crash: when issued less than two years ago, the March 2073 Index-Linked Gilt was priced at around £330 per unit of stock; the current price is just £62, or less than a fifth of its value when initially sold.
The effect has been to transform a negative yield of 2.5pc into a positive one of 1.13pc.
So is that a better or worse outcome than Spud’s 1% “high interest” bonds?
Recalls a dispute with Spud in his own comments. His inability to understand that shares & bonds are flows not tangibles. And thus that all investment in them is infinitely fungible. So Sunak didn’t “pump up” stock market values for some inexplicable reason. It was the simple result of the artificially low interest rates Spud himself was so keen on.
One thing that I saw somewhere the other day was because mortgages in the US are fixed for the period, anyone who has an old mortgage from the low interest years is sitting pretty, but their bank is sitting on a massive capital loss (a mortgage paying 3% when new ones are 6% will be worth half the latter). So is this the next big thing that blows up the financial system? Or is it a nothing burger because the holders do not have to mark all these mortgages to market as long as they hold them to term?
One reason I’d hesitate to buy a 50 year ILG is that I doubt that the Islamic Republic of Britain will pay interest.
Not sure about the bank impact of fixed rates, but definitely an impact on cost of living for people as fixed mortgages roll over and rates and monthly payments go up., there’s still a lot of pain to flow through to the consumers
BiS
Despite his claims to expertise he’s out of his depth in most, if not all economic topics but his ignorance of stock markets is near total. He’s like a Caveman confronted by a T-1000 Terminator. Hence his comments ‘They’re all Ponzi schemes’ or suchlike
The ‘They’re all Ponzi schemes’ was the only correct comment he’s made on the matter. Although I doubt if he could understand why.
Think about it. Any “value” set is purest fantasy. One never knows what a share will be sold for. “Value” is set on price. Which is historic. It is the last trade done by buyer & seller. For for every buyer there must be a seller. So that last trade transferred wealth from one person to another. There was no net creation of wealth. And the price has been like that, all the way back to first issue. Every buyer has had his seller. There has never been a net increase in wealth. All the gain of a market price has passed from buyers to seller.
So “value” is based on the possibility of the next trade. Which presumes the market continues to function. What happens if you stop it? No seller is able to find a buyer. The effective price of his shareholding is zero. So the real “value” of the entire share market is zero. Since there would be nobody to buy it. All the supposed “value” in shareholders’ hands is just the sum total of their money fed into the system which is promptly lost. But there’s no net wealth lost because it never existed.
Now if you reckon that isn’t a Ponzi scheme, I’d like to know what is?
Simple bond maths rule of thumb
% change in value = duration x % change in rate. So a 5% change in a 10yr duration bond = 50% change in value.
Convexity matters at these large changes and the curve isn’t flat so again not accurate. Long rates have moved much less than short rates.
And then the swap spread (gilts – swaps) is 40-50bps as well. Gilts are not nice to hold until rates peak. Apparently according to our head trader hedge funds are all about curve steepening (short rates down/long rates up) now. So higher for longer.
Gilts in trouble in 24 is my bet.
@BIS. Shares have value as they are a claim on future distributions from a company to its shareholders. The company can pay dividends or buy back shares. Share price = present value (expected distributions) adjusted for risk.
Different people have different ideas of expected distributions and risk, so shares are traded between those who think ‘it’s not that good’ and ‘wow, what a bargain’. Both are made better off by the trade. And society is better off with financial markets as it allows people to sell their holdings in companies to someone else without having to wait for dividends or share buybacks. If markets stop the value in the share doesn’t suddenly cease to exist. It does however make it very hard to realise quickly, or even put a value on as you can’t see what other people think it’s worth.
This is not necessarily an unadulterated bad thing actually as people can ‘pump’ a share price by talking it up ,and then selling. That’s unethical, illegal if done with specific knowledge that what you are saying is incorrect. “Talking your book’ is the phrase for when you think you’re right but everyone else is wrong.
What can be derived from that is fun, because it makes all his wonderful ideas Ponzi schemes as well.
What is actually happening in any economy in the instant? Surely, that’s just the sum total of all the consumption of goods & services in that economy in that instant. For every consumer there must be a producer. There are only goods & services, nothing else. You can ignore assets, because assets can only have utility value in the instant. Although it may take the consumption of goods & services to create an asset. So we can regard assets as services or goods as suits. We facilitate commerce with tokens of entitlement to consumption. For convenience sake we use government money to represent those tokens.
Now all finance is about moving entitlements to goods & services into the future. But all of those entitlements have to be exchanged for entitlements to consumption in the present. There no wealth being created or destroyed in the instant.
The future value of those entitlements is dependent on future production of goods & services. That is an unknown. There’s no guarantee there will be any production. Again, it depends on the system continuing to function. It’s Ponzi schemes all the way down.
Shares have value as they are a claim on future distributions from a company to its shareholders.
The important word you left out is anticipation. All stock market prices are just matters of opinion. By definition, half of those opinions are wrong. Hence buyers & sellers.
Strictly speaking “talking your book” is trying to get yourself out of a position you’d rather you weren’t in. So if you’re talking something up, you’re an intended seller.
You’re right about the ‘talking your book’ to get out of it. I claim a long workday as an excuse. That said I did cover the ‘anticipation’ point in my next phrase on future profits. We all have different beliefs.