SPX: Macroeconomic 101
It have been months since I have posted an update in TradingView, today I will be discussing 101 of macroeconomics which will help to understand the relationship between Monetary Policy, Cashflow and inflation without making it super complicated.
1- Cashflow:
Big money flow which interest go, as simple and as complicated as it seems. Instead of looking at currencies as purchasing items, we can look at them as exchanging items, for example when you try to buy an car, you are exchanging a car for x amount of USD, and when you are selling the car again, you are exchanging the car for X amount of money.
Big money usually will try to find the highest interest on the currencies they have while considering the risk of safety to get their cash back, when central bank decrease interest rates which mean keeping money in banks will get investors or cash holders less return on their money than before, that is why there will be sale of currencies and buying of commodities/stock/business/investments that is expected to provide a higher return than banks.
2- Monetary policy and Interest rates:
The purpose of interest rates changes are to control inflation rates, low interest rate promote more loans to be taken and less deposits with banks, low interest rate will make the market environment to be more creative in order to create income more than what the interest on loans are, this will help companies to grow and money to cycle in markets more than bonds and deposits. Hence, the less interest rate, the more likely spending increase which as a result prices will grow. This help central banks achieve their objectives or steady growth and maximising employments.
3- Inflation:
When the market get heated and purchasing power is strong, it is normal for the purpose of balancing supply and demand in the market for prices to increase, every sector will be impacted differently. When inflation increase to a level that effect normal average consumer, central banks need to encounter this inflation increase by trying to reduce market activities, this will be done by increasing interest rates, when interest rate increase, money will flow from risky investments to less risky once as they provide a higher interest, which as a result will reduce the activities across economies and will motivate less spendings, spendings will be exchanged with demand on currencies which will increase demand on USD (USD will increase), which in line will make bonds prices to drop (yields to increase). As we are also noticing that FED are trying to reduce QE in markets as to reduce risk of inflation.
When we factor in the current geopolitical matters, I will expect the SPX to continue moving sideways or downside, good opportunity for buying groceries at discounted prices for long term portfolio, I will be a gradual buyer as there is an element of uncertainty related to the countries decisions in regard to economics, globalisation and geopolitics.
Buying great companies at fair price is BETTER than buying cheap companies at great price.
Until next time,
AgentH
1- Cashflow:
Big money flow which interest go, as simple and as complicated as it seems. Instead of looking at currencies as purchasing items, we can look at them as exchanging items, for example when you try to buy an car, you are exchanging a car for x amount of USD, and when you are selling the car again, you are exchanging the car for X amount of money.
Big money usually will try to find the highest interest on the currencies they have while considering the risk of safety to get their cash back, when central bank decrease interest rates which mean keeping money in banks will get investors or cash holders less return on their money than before, that is why there will be sale of currencies and buying of commodities/stock/business/investments that is expected to provide a higher return than banks.
2- Monetary policy and Interest rates:
The purpose of interest rates changes are to control inflation rates, low interest rate promote more loans to be taken and less deposits with banks, low interest rate will make the market environment to be more creative in order to create income more than what the interest on loans are, this will help companies to grow and money to cycle in markets more than bonds and deposits. Hence, the less interest rate, the more likely spending increase which as a result prices will grow. This help central banks achieve their objectives or steady growth and maximising employments.
3- Inflation:
When the market get heated and purchasing power is strong, it is normal for the purpose of balancing supply and demand in the market for prices to increase, every sector will be impacted differently. When inflation increase to a level that effect normal average consumer, central banks need to encounter this inflation increase by trying to reduce market activities, this will be done by increasing interest rates, when interest rate increase, money will flow from risky investments to less risky once as they provide a higher interest, which as a result will reduce the activities across economies and will motivate less spendings, spendings will be exchanged with demand on currencies which will increase demand on USD (USD will increase), which in line will make bonds prices to drop (yields to increase). As we are also noticing that FED are trying to reduce QE in markets as to reduce risk of inflation.
When we factor in the current geopolitical matters, I will expect the SPX to continue moving sideways or downside, good opportunity for buying groceries at discounted prices for long term portfolio, I will be a gradual buyer as there is an element of uncertainty related to the countries decisions in regard to economics, globalisation and geopolitics.
Buying great companies at fair price is BETTER than buying cheap companies at great price.
Until next time,
AgentH
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