What I’m saying is the opposite of what I am supposed to put forward as an economic idea. According to conventional economics, if high interest rates exist, then share prices should fall. But they haven’t. Since 2021, and I’m going to use the UK as an example, the rate of interest rose from 0.25 per cent – this is the Bank of England’s base rate – to 5.25 per cent, and it’s only just declined for the first time – now being at 5%.
Over that same period, the FTSE share price index rose from a bit over 5,000 to nearly 8,400. And if we go from mid-2021 to the events of July 2024, the increase was from around 7,000 for the FTSE 100 to 8,400 – an increase, in other words, in the index of 20%, which of course does not mean that every share price went up by that amount.
But what is clearly obvious is that during this period the claim that high interest rates should reduce share prices did not hold true. So, all of those who’ve been trying to tell me I’m completely wrong to say that high interest rates have resulted in high share prices are putting forward a falsehood, in my opinion, because I can see the evidence to the contrary in the real world all around me, not just in the UK, where I’ve just noted the figures, but also in the USA and elsewhere.
It’s real interest rates that matter. After inflation…..
And he’s full of shit too. At the beginning of 2021 the FTSE 100 was already up to 6800.
Interest rates didn’t start rising until Dec 2021 by which time the FTSE had already recovered to 7500.
It closed at 8144 today. The actual rise from when interest rates started rising to today was more like 8%.
Interestingly it’s his beloved MMT and the Magic money tree which has caused massive asset price inflation across all asset classes. The other causes being COVID measures, Net Zero, Unlimited migration and QE, which is why the advocates of all these policies (and Murphy is a supporter of all 5!) need to be taken to task – if we can get some ‘Far right’ protestors to Ely hopefully he can suffer the consequences of his lunacy personally, EDIT – NO, NOT THAT SORT OF LANGUAGE, NOT IN THE CURRENT ATMOSPHERE
Had Murphy not already resigned from ICAEW earlier this year (under threat of expulsion) that post would surely be grounds for them to exclude him on grounds of bringing the profession into disrepute.
Presumably his academic colleagues read his blog from time to time. What do they think about having such a polemical simpleton in their faculty and the effect it has on their own credibility? And his students who are paying fees for this sort of idiocy?
Candidly IMO, out of a long, long list, this may be a contender for the stupidest post he’s ever made. It’s staggering that he considers himself to have expertise in accounting and economics.
Channelling Russ Abbott?
Oh, what an atmosphere
I love a party with a happy atmosphere
So let me take you there
And you and I’ll be dancin’ in the cool night air
Discounting a long run dividend stream at a short-term base rate? Why?
Under the standard finance model, share prices depend on the term structure of the risk-free rate, the term structure of the risk premium to equities, and the expected stream of future dividends. Explaining a mutivariate effect with only one variable is problematic. This is a favourite trick of lobby groups using statistics to justify their demands.
Sigh.
The existence of high interest rates does not make equities fall, quite the opposite.
An increase in interest rates, or market anticipation of such an increase, makes equities fall.
The reason is quite simple: when interest rates go up, the prices of existing bonds fall, since a bond price is just the discounted value of the bond’s cashflows. That makes bonds relatively more attractive than equities, so equity prices fall too to keep the two in line.
OTHER THINGS BEING EQUAL, an increase in interest rates should reduce the present value of future dividends and, consequently, the price of equity shares.
Are other things equal since the general public and the stock market realised that we are not all going to cough ourselves to death so that there actually is a future in which Shell etcetera can pay dividends?
Is Murphy capable of realising this?