A Bourse Diary

Thoughts on stocks, speculation and ... life

Wednesday, November 16, 2005

Inflation Fears (3)

Compared with 1993-1994 the interest rates, particularly the long duration bonds, are too low now. On the one hand, it shows that the market does not really believe the inflation story in mid to long term. On the other hand, it is obviously too much money out there, that looks for the safety of a fixed interest. America may not save particularly much (although, I would place this under question marks despite a statistical savings rate of 0%), but in the global world there are many which save almost extremely (Germans, Japanese, Asian altogether, etc.).
Low interests actually offer ideal conditions for the financing of investments, thus, for growth. We see good growth rates in some parts of the world, but the investment activity is not quite pronounced. The companies can manage the demand with the existing capacities, especially given the constantly increasing productivity . Thus, they need not much money from the capital market (for instance from the corporate bond market).
In principle that situation should positively affect the stock markets. Nevertheless the large indices did not reflect this by now. To me, we seem to accumulate great potential for a bullish upturn.

The problem, however, is that with arising inflation the abnormally low interests of long duration bonds should rise. That complicates the forecast for the next months: if the money should move toward shares, we will see of course higher stock prices.

However one should also expect that the positions in bonds move only to shorter durations (the skeptical bond investors might not become enthusiastic on stocks over night). With rising long-term interest rates, however, the economic dynamics will weaken somewhat (as I assume - only somewhat) and will automatically worsen the relative valuation of the stocks versus loans.
But will this influence the stock prices?...


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