Suddenly something

Not sure how many of you remember this small box called 'Suddenly something' that used to pop up in the Economic Times' Op-Ed page. Mom loved to read it. Mom's still around, however, I can't say the same for the little box that usually contained some quirky, left-of-field fact or anecdote. It always was about something that you wouldn't read about in the mainstream. This website called Finshots is a good example of such content (well, usually). Aeon or AlDaily are good examples too, however for long-form content. As usual, I digress. 

"Suddenly something" came to mind because that's precisely what happened today. All was copacetic till about 13:33. Well, the downward slide had begun at 9:15, but it was like a nice, easy drive down a gentle ghat. The precipitous dip in the middle of lunch hour was the "many a slip between the lip and the cup." A bit like Humpty Dumpty had a great fall, and shat his pants while at it. Allow me to illustrate. 

Beautiful, eh? It's these sort of sights that fill me with delight. While the mad, mad world is panic-selling, they are driving down prices of those precious stocks which were trading at sinful levels until now. You can at least think of buying them after they have fallen from grace (sort of). Again, I'm no financial advisor. I simply like buying stuff when it's available for cheap. Especially the costly stuff that the filthy rich think is their preserve. 

Think iPhones. You don't need to sell a kidney and half your liver to get one. All you need to do is wait. You bought the 12 already? Awww, so nice. How much value did it add to your life? Besides the three-second ego trip which turned into a downward spiral the moment you received the automated transaction message from your credit card company? Be chindi. Cheap, if you may. Wait for the Big Billion Sale/Diwali sale on Amazon or Flipkart. Your current iPhone will last you for another two of those mega sales, so relax. The 12 can wait. Or buy the SE for 25k (or even lesser during this year's sale). Or wait till Apple launches the next SE from the parts bin of the 12 Mini. Ouuuuu, that would be fun. 

Same logic with stocks. Don't be dumb. Don't buy them when the newspapers tell you to. Goodness knows how many times I've repeated this line on this blog which is just four posts old. A senior who I work with and respect a lot said this to me one time. "Don't buy stocks at a small discount. There should be a fucking sale when you go and dip your pale." The sort of Black Friday sale where two women fight tooth, nail and ingrown hair over the last hair drier. 

But yeah. Strangely enough, there seems to be some consistency in one aspect of these posts. The markets have closed in the red for the past three consecutive Fridays unless of course yours truly forgot to write last Friday. It's almost as though heavyweight investors remember a long-planned holiday, and cash out of the markets to roil in frivolities over the weekend. Their cash, their wish. The retail investors will get fucked over anyway. Especially the newbie day-traders who think they're gods. 

According to the senior who I mentioned about before, the US bond yields shot up, which was one of the reasons for the crash. You must wonder how bond yields can cause such a dip in the markets. Again, I have a preliminary understanding of the subject, so I shall try and put it in simple words. 'Try' being the keyword here. 

Inflation is a term that we all are surely familiar with by now. Hopefully. Crudely put, it's the rate at which your purchasing power goes down the drain/erodes. Since the US has sort of started a printing press in the form of the dollar (what with all the stimulus cheques being distributed like candy), there's a lot of money floating around. The basics of supply and demand mandates that if there's too much supply of something, its value decreases. A bit like the value of your attention if you give someone too much of it. Same with money. If there's too much floating around, its power to purchase goods erodes. Inflation. Ta daaaa....

So... how do you solve the problem? I bet that there are a gazillion ways to do so, but one way is to absorb the excess money from the markets. The government does it by issuing bonds. The government says "Loan me your money and I'll return it to you after some time, plus some interest (yield) on top to sweeten the deal for you." You'll go "Yaay, sounds like a nice way to protect my cash, so here, take my money." Very well, except that if you put that money in the stock market, your money is likely to fetch more in terms of outright rate of return. Now, you must think "Nah, Uncle Sam (or Savita aunty, because...), I will go to the riskier stock market for higher returns because I'm human and humans are secretly junkies."

Now, to rein in inflation, the government says "I shall issue new bonds which pay you a higher rate of interest than the older bonds if you lend me your excess cash. Plus, I'm the government of your country. My word is THE word. Your investment is nearly zero-risk, because I'm the all-singing, all-dancing lord of the supposedly free-thinking West (in case of the USA). Xi's snickering on the other end of the globe. Anyway. The point is that now you have a safer investment instrument that offers decent returns. So, the sensible part of your reptilian brain says "Screw dopamine, put cash in the bonds and chill for a bit."

The sensible part of the big-ticket investors has been turning on and off for the past few days. They take cash out of the stock markets and put into the safer bonds, now that they offer better returns. Here's the trick. These bonds have long maturity periods. Say, 10 years. So, every time the government issues new bonds, there's a pile of old ones (returning X%) lying around. However, since the newer bonds offer better returns (suppose X+2%), they seem more attractive to investors, because who doesn't like better returns. 

The demand for the newer bonds goes up, while the demand for the old bonds goes down. That drives down their prices. Suppose that one of these old bonds was worth ₹100 when issued. It returned an interest of say, 5%. Now, one of these fancy new bonds came up because of which the old bond's price went from ₹100 to say ₹90. Mind you, the old bond still returns you ₹2 as interest. Effectively, the yield rose from 5% to 5.5%. Lovelier if the prices of the older bonds drop further. Or, not so much for the stock markets. 

Not as good for the stock market because, after the yield increases on the older bonds, large and small investors find the improved returns coupled with the safety net of bonds rather alluring. Annnd... out goes the cash from the stock markets and into bonds, and hence the fall (or at least one reason for the fall). 

But, there seems to be more to it. If a government issues bonds with higher returns, that itself is probably a sign of a rise in inflation. Since a lot of us in the markets are pussies of the first order, we panic around such conclusions. Then, we imagine the whole bond cycle playing out, money being sucked out of the markets, the works, and sell off our stocks in a panic attack. It's a bit of a self-fulfilling prophecy, which in turn, may drive the market down. In fact, if you notice, a lot of what happens in the stock market is a bunch of self-fulfilling prophecies. Or, maybe I'm terribly wrong, of which there is a strong possibility. 

There is no moral of the story here. The bond yields of US treasuries seem to have shot up, which might have cause the Indian markets to plunge into the red. That, or suddenly something happened and some expert may have an explanation to what that was. Importantly, if you see some good stocks trading cheap, buy them, maybe? Hopefully, you'll make a lot of gains, or I sincerely hope, wish and pray so. Peace.