There seems to be a small community of people who like what I write here. I’d be ok to write more long-form content (essays), but it would be nice if you could give me directions. What kind of topics would you like to know more about? Finance and investing are vast domains…
Some say that the central banks are the only or one of the major reasons why stock prices are rising.
Others say central bank are one reason among many, or play a little role, if any.
So far I have not come across a thorough analysis of the matter. I’m not sure if one can even actually quantify the influence of central banks.
That’d be something that would interest me.
They are not the only, but more and more a major reason.
Long time ago, there was a bond market and a stock market as mainstream markets.
So for financial investments, investors had a choice. They could build a portfolio with a mix of bonds with different yields, durations, risk levels, and stocks.
Since 2003 (since the Fed has set its benchmark rate below inflation rate) and definitely since 2008 (one bubble later), There Is No Alternative (google for the TINA acronym) to stocks.
A side effect is that pensions funds now rely on the stock market, so the Fed has to raise regularly its floor level.
Additionally zero rates allow for infinite leverage, which helps the rise of stock prices (not only, it can be prices of other investments).
How can I optimize my buy and hold strategy of VWRL (quarterly investments) using options trading?
That’s exactly what I mean. Yours is an opinion, an impression, a feeling.
There are many others who say the opposite.
I’d be interested in a quantitative analysis.
Probably it’s impossible to escape the non-quantitative part. Even central bankers themselves disagree on that question. Now there is the question of the choice and opportunity cost.
Say you have a certain sum to invest (as a fund manager) for a certain time and you have the choice between:
- bonds of company X with a 3% yield
- shares of the same company X with 5% dividend
That’s the “red-pill” variant.
In a parallel “QE blue-pill” universe, you could have the choices
- bonds of company X with a 0% yield (or just keep the cash in a vault)
- shares of company X with 2.5% dividend
X is a large stable company in good shape (Nestlé is the typical example).
Now, it’s impossible to prove the figures of the example are consistent (although you can grab for X=Nestlé some past data).
The next step is to ask 1000 people about what they would choose for which variant . Mixes are possible: from 0% bonds, 100% stocks to 100% bonds, 0% stocks.
My guess (again an impression ) is that the answers will be different between variant “red” and variant “blue”.
My input: “red”: 50%, 50%; “blue”: 20%, 80%.
Did Quantitative Easing Only Inflate Stock Prices? Macroeconomic Evidence from the US and UK by Mirco Balatti, Chris Brooks, Michael P. Clements, Konstantina Kappou :: SSRN and a few other papers seem to argue that most of QE went into inflating assets prices.
I’m having a hard time finding papers stating otherwise, but I probably should refine my query.
Exactly. And maybe, if Mr @Julianek feels like it, he could serve us one of his nice and thorough studies on the topic.
Interesting, thank you!
Additionally, if a majority of papers confirm this hypothesis, it becomes the truth, since 99% of people follow other people’s opinion (NB: it works recursively). Then you find in Wall Street Bets that JPow makes brrrr with the money printer, it’s why you have to YOLO to the moon .
Ultimately people post videos about Elon printing money (the “information” about the central bank and QE was lost on the way).
A nice counter-example is Japan. Perhaps experts there have found that QE does not influence stocks, and it has worked so far apparently.
I did a bit more research yesterday, I looks more nuanced (but what’s hard is that I am not enough of an expert to make sure I have the right search terms )
I probably should ask my sibling who’s doing that as their job (working for a central bank).
Interesting, I did not expect that the questions would be mainly about macro factors (my strengths are more at the microeconomics/business analysis level), but I will try to take that into account
I know the video. He says central banks are just one factor among many.