Everywhere, and without exception, traders are, utterly bizarrely, at a time of crisis when they should be heading for safety, selling bonds and buying shares. After all, the money to fund this mania has to come from somewhere, and this chart makes clear its source. When government bonds are sold, the effective interest rate increases. That is because, in practice, the amount of interest paid on bonds is fixed, meaning that if the price falls, as happens in a net selling market, that fixed interest payment appears to be more valuable in terms of the interest rate earned.
….
The likelihood that this might be as bad as 1929, with consequences at least as severe if governments do not take action to bail out many of those who will be impacted, is very high indeed. In that case, if you look at what is happening in financial markets, the only reasonable conclusion to reach is that those trading in them are giving themselves a massive dopamine hit at cost to the rest of the world before the crisis arrives.I am angry because governments are going to have to bail out banks and even major corporations as a result of what is going to happen. We will be doing QE again, but this time we have to get it right.
Govts are going to print more money and piss it up the wall again. This will ignite inflation.
Bond prices should be falling in such a scenario, no?
You won’t be doing QE if markets are bearish of bonds.
I know his whole scheme depends on not understanding this but if they’re selling bonds they think that’s the way to “head for safety”.
We know what happens every time with Labour governments. This time the tories set them up for it by their own insane amounts of spending.
MNtM25, but shurely everybody knows just how much smarter Murphy is than anyone else and therefore the markets must have it all wrong.
And I thought when liebour got elected that it was the first time in my lifetime they had inherited the sort of financial disaster they usually leave for the Tories…….
Seems to me he doesn’t understand the difference between traders and investors
Seems to me he doesn’t understand the difference between shit and shite.
A usage that’s seldom got right.
It is not possible to explain financial markets to Murphy because he refuses to believe that inflation reduces the value of the pound note in your pocket and like the Russian language he does not know that there is a difference between “valure” and “price”.
If inflation increases bonds automatically have less value, some shares lose value, others do not, some lose value but to a lesser extent than bonds or pound notes. Sensible traders and investors will swap bonds for shares which have lost less value before prices realign to match the lower values.
It’d help if you knew the difference between value & price in markets. Price is the result of a transaction. Market “prices” are bids & offers. Value is an opinion..
Hmmm… but isn’t the price the result of the opinions of the buyer & seller…?
Price is the point where the seller thinks “the value is less than this” and the buyer thinks “the value is more than this”.
It’s not unique.
For the price to materialize in a transaction there also has to be some combination of “If I wait, the offer may go up/down and I don’t want that” and “I don’t want to faff about more, it’s not worth extra time”
I *do* know the difference between value and price – which is why I said traders will swap the bonds that are more over-priced relative to value for shares that are not (or less) over-priced.
You are over-simplistic to say “Price is a result of a transaction” – it can also be the case that a transaction is a result of a price. Market-makers quote buying and selling prices even if no transaction has ever taken place in that security.
You and I may have different opinions about the value of a security is – depending on the discount rates that we employ and the risk that we attribute to our forecasts of the future. That is separate from the reality that value is subjective in that a portfolio or single security that matches an individual’s cash flow needs is worth more to him/her than to another individual with a radically different pattern of projected cash flow – or the extreme case that my made-to-measure suit would be worthless to you and yours would be worthless to me.
When I am considering stock market securities value is a calculation, not an opinion, and it is a different calculation for taxable funds, for tax-exempt funds and for individual investors.
A transaction can be indeed be the result of a price. Offer goods for sale at a ridiculously low price and a sale is very likely. Offer those same goods at an overly high price and the result is no transaction. Transactions happen when the range of prices acceptable to both sellers and buyers overlap. If those two don’t overlap no transactions occur so it’s impossible to price or rather there are two price ranges being suggested, neither of which are right.
Market-makers quote buying and selling prices even if no transaction has ever taken place in that security.
Market makers’ quotes are by definition transactions that haven’t taken place. A transaction satisfies both seller & buyer, so they are no longer in the market.
You also got your value the wrong way round. When the price moves, nothing whatever had changed with the bond. The coupon is the same, the redemption’s the same. It’s everything other than the bond has changed. It’s about relative yields & yields relative to inflation/ForX.
And calculate all you like, you don’t know what something will be sold for until it’s sold. So its value is pure opinion.
With reference to Richiebollox & QE. He presumes QE would reduce yields on UK government paper & thus cut interest rates. Because historic. But this is future. Bond traders may respond by saying “Sure you can buy this paper at the price. Been wanting to shot of this shit. Want any more? ” And continue to mark down UK Gov debt. Much as Richie may want it, no one is obliged to to lend the government money
If the market rate of interest changes overnight then the value of the bond (being the discounted value of future intetrest and capital payments) changes. The price then moves as investors (and market makers’) views of the value changes.
That is so elementary that I should not need to explain it to you.
Since I just explained it to you…
{:0
“Market-makers quote buying and selling prices even if no transaction has ever taken place in that security.”
If no transactions occur at those quotes, it’s not a price. It’s information about what others think is a reasonable price. Which is an opinion, not a price.
This was driven home for me a few years ago when my sister and I were selling my father’s condominium after he passed. We quoted several prices that varied quite a bit, and withdrew from the market a couple of times before someone made an offer that we accepted.
There were many opinions on the price, over the course of this. The so-called price varied by about 50%.
It is a price in as much anyone else can choose to buy or sell at the prices the Market Maker offers. The Market Makers job is to play with the price nudging it up or down so that people buy and sell and the market keeps trading and the price remains fresh and accurate.
Fun Fact: – One time this didn’t happen in simpler times decades ago was when a bunch of our traders went on a skiing weekend hosted by the traders in the Zurich office. Due to weather (or possibly alcohol) non of the traders got back for market open on Monday morning. They phoned the tech support team who were in and instructed them to open the spreads where they were the Market Makers such that the Buy price would be too high for anyone to consider buying and the Sell price too low for anyone to sell.
Bond values are affected by bond prices. I.e., my bank bought a lot of government bonds for “safety.” Interest rates went up, hence bond yield rates went up. My bank was stuck with low yield bonds that could be liquidated only by selling at a substantial discount.
Stock price still hasn’t recovered from the loss.
From what risk was it trying to protect itself?
[Government bonds would have some use matching term deposits at a lower yield, but …]
Is there anyone out there who manages to be stupid, obnoxious, ignorant and self- assured of his own expertise as this guy? To be honest it’s so stupid a post it’s almost beyond parody.
To be honest, most of them are V_P. Something changes, the back room boy experts crunch their numbers & come up with their opinions. half of the opinions conflicting with the other half & markets flounder around a bit. And mostly it all ends up back where it started. Look at the Truss interlude.
Markets are future looking & in times of uncertainty there are multiple different futures. But in reality, generally you quickly lose the outliers & opinions coincide towards something isn’t much different to today. How much volume was traded? Usually a tiny proportion of the total issuances. Most people did precisely nothing.
In this time of crisis the Emenence Graisseaux warbles. It’s a shame the supposed experts didn’t spot the nascent crisis about 3 decades back & change direction. How much different is it now than it would of been if the Tiny Indian was still in the hot seat? By Guidos counting Starmer/Reeves have 30 relaunches & done about as many U-turns. How much difference will it make if Starmer continues or is replaced by Streeting/Burnham/even Crayons? The options open to HMG are very limited & none of them particularly encouraging. And if Nige walked into No 10 tomorrow it wouldn’t be any different.
Anyway, it’s not market traders who get in a panic & run around in circles. It’s the people giving them their instructions. We’ve bred these idiots & now we’re lumbered with them.
Bias
One of the great posts you put in (they’re pretty much all great to be fair) was to make the point it’s Murphy’s world now – we just live in it.
I think much of his anger is that while his policies are pretty much in place across the globe, which is why we’re in such dire straits economically – he isn’t in a position of direct control hence posts like this one
But you are spot on with regards to trader herd mentality.