A Quote by Benjamin Graham
The investor should be aware that even though safety of its principal and interest may be unquestioned, a long term bond could vary widely in market price in response to changes in interest rates.
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To investors, job creation is a second-order effect. Market participants care first about interest rates, exchange rates, bond prices and the one great factor that affects all three: the long-term solvency of a bond company called the U.S. government.
Stock price multiples are negatively correlated with real interest rates. As interest rates rise, the market multiple will fall.
Since 2008 you've had the largest bond market rally in history, as the Federal Reserve flooded the economy with quantitative easing to drive down interest rates. Driving down the interest rates creates a boom in the stock market, and also the real estate market. The resulting capital gains not treated as income.
The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. The speculator's primary interest lies in anticipating and profiting from market fluctuations. The investor's primary interest lies in acquiring and holding suitable securities at suitable prices. Market movements are important to him in a practical sense, because they alternately create low price levels at which he would be wise to buy and high price levels at which he certainly should refrain from buying and probably would be wise to sell.
So the stock market could have a negative wealth effect and weigh on capital spending, but a sharp decline in long-term interest rates would be an important counterweight.
One component of the leading economic indicators is the yield curve. Bond investors keep a close eye on this, as it illustrates the spread or difference between long-term interest rates and short-term ones.
A higher IOER rate encourages banks to raise the interest rates they charge, putting upward pressure on market interest rates regardless of the level of reserves in the banking sector. While adjusting the IOER rate is an effective way to move market interest rates when reserves are plentiful, federal funds have generally traded below this rate.
If we are going to have a Fed, it should not fall into the tyranny of experts with the a fatal conceit that a few wise people can determine interest rates. Interest rates should be driven by the market, and people's time preference, and we see these boom-bust cycles.
The real challenge was to model all the interest rates simultaneously, so you could value something that depended not only on the three-month interest rate, but on other interest rates as well.
For people who grew up in the last four decades of the 20th century, it is hard to grasp the concept of negative interest rates. How is it even possible? If interest rates are the price of money, is the marketplace broadcasting that money is on sale? Are we just giving it away?
We are convinced that the intelligent investor can derive satisfactory results from pricing of either type (market timing or fundamental analysis via price). We are equally sure that if he places his emphasis on timing, in the sense of forecasting, he will end up as a speculator and with a speculator's financial results." And "The speculator's primary interest lies in anticipating and profiting from market fluctuations. The investor's primary interest lies in acquiring and holding suitable securities at suitable prices.
Let's have honest interest rates. Let's let the free market set interest rates in that zone where supply of savings is matched up with demand for real borrowing for capital projects.
Thus a long term corporate bond could actually be sold to three separate persons. One would supply the money for the bond; one would bear the interest rate risk, and one would bear the risk of default. The last two would not have to put up any capital for the bond, though they might have to post some sort of collateral.
The fact that the bond market is rallying today is a plus. If this ends up being a bear market, it will be one of the first ever that began when interest rates are down.
The FOMC has considerable control over short-term interest rates. We have much less influence over long-term rates, which are set in the marketplace.
It's one of the fundamental principles of the stock market: When interest rates go up, stocks go down. And along with financial companies and cyclicals, technology companies - with their sky-high price-to-earnings multiples - should be among the biggest losers in an environment of rising rates.
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