The relationship between bonds and stock market
(2013-11-26 21:05:07)
- Speech at a luncheon in London on November 24 (excerpt)
In June 1986, I worked in the head office of the People's Bank of China. The first monthly salary is 54 yuan (including 5 yuan for eggs and 3 yuan for transportation). However, the office withheld my subscription of 10 yuan treasury bonds. At that time, every cadre had to subscribe to treasury bonds with an annual interest rate of 10% and a five-year term. Everyone mumbled, but had to accept.
At that time, there were two dealers everywhere in Xidan and Sanlihe, who bought and sold treasury bonds for five years. I remember very clearly that they are basically half price, even 30% to 40% off. Why? There are two reasons: there is no legal transfer of treasury bonds in the secondary market. Moreover, inflation is serious. In the case of serious inflation, I think the price of treasury bonds in the black market was quite reasonable at that time.
I will not predict the inflation in the next 5 to 10 years. However, the yield of 10-year treasury bonds is now around 4.7%, which is a symbol of optimism in the market. Optimism is certainly a good thing. Tomorrow is always better. However, once you find yourself overly optimistic, bond prices will fall, especially long-term bond prices!
The bond market and the stock market are interlinked: everyone's optimism about the bond market will certainly affect the stock market. In other words, people are quite optimistic about the prediction of the inflation rate and risk coefficient of the stock market. I think people at that time might be smarter than they are now.
I want to repeat three words: (1) The P/E ratio of the stock market is the reciprocal of the long-term market interest rate (plus some percentage points on the basis of the national debt interest rate). In the short term, this statement may not be correct, but in the medium and long term, it is not a problem.
(2) Inflation itself is contractionary. Well? In the case of inflation, if the central bank caters to inflation, that is, increases the nominal growth rate of total credit, then the nominal market interest rate will rise accordingly. More water, more noodles, more water. Over the past three decades, we have basically seen this spiral rise. Conversely, if the central bank fights against inflation and keeps the nominal growth rate of credit unchanged, it is a disguised tightening. If the central bank goes further and reduces the growth rate of total credit, liquidity will be extremely tight in the short term, just like choking your neck, you can't breathe. Of course, in this way, the inflation rate will fall quickly, and even deflation will occur, Then the stock market fell , ushering in the blue sky and white clouds.
(3) People in the stock market (especially analysts) are basically "cheerleaders". Sing well without feeling unfair. I have been a cheerleader for more than ten years, with a little experience. We tend to confuse hope with judgment.
Hong Kong is looking for stock analysts. A leading Chinese investment bank based in Hong Kong is seeking 2-3 research analysts to cover pharma and metals & mining sectors. You must have 3-4 years of experience in a foreign investment bank. Interested? Send me an email for a confidential discussion, at joe@chinamezz.com
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