Inflation and Rate Hike and Expectations in the US and Asset Prices...

It is really a big question, that what course do investors take in case of higher interest rate and inflation expectations which is good for margins and earnings, business have an excuse to raise prices? The Fed has said that inflation and expectations are only transitory which is supported by the evidence, lower prices have always followed inflation and higher prices due to the debase effect, when price increase too much, also because the central bank would try to stabilise the prices though supply would also increase due to lower price expectations... Long-term Investors should remain invested as it would pass soon with correction in the short-run, short run investors could buy at significant dips, as it could increase compounding... Any correction would be short lived and would be followed by a better the long-run story... Higher inflation and interest rate expectations could increase selling and supply thereby lowering the price expectations and more buying by the investors later... Any correction is an oppourtunity to lower average cost...

Lower money supply and higher interest rate expectations could lower demand and price expectations which could also increase supply and lower the price-level or inflation... At lower valuations the assets could again become attractive to buy again at lower prices...Unconsciously investors actions and expectations affect the valuations... If they think that prices would fall and hold demand and increases supply price would fall and vice versa... Any intervention by the central bank would increase volatility and reinforces the prices through the borrowing cost... Lower borrowing cost would further reinforce lower price and vice versa... Both, lower prices and higher price expectations increase demand and lower supply... Lower prices increase demand and higher price expectations also increase demand and lower supply... While higher prices and lower price expectations increase supply and lower demand... The Fed has to choose that it wants to increase demand by lowering prices or it wants to increase demand by increasing price expectations by adjusting interest rate and expectations... Higher interest rate would lower demand and price and expectations, supply or selling would increase... Lower interest rate would increase demand and prices and expectations, supply would go down... The objective is to stabilise the interest rate and prices at full employment...

Investors should understand that higher inflation has been due to the base effect, our base case had been too low, last year inflation struck too low due to low demand, that inflation is relatively high compared to the last year because last year it was too low... But in nominal terms the difference might not be that large if inflation two years back was the base when there was no covid... The Fed is repeatedly reiterating that unemployment is still high and and there is excess capacity which would increase labor productivity and supply which would stabilise the price-level, upto full employment more supply would help contain inflation... Clearly this is not the time to sell assets because the Fed is still accommodative in the Monetary Policy commentary and it would take time, at least for the next quarter... In the near term there is no danger of any significant prices correction and loss... 

Otherthings remaining constant, current stock price is a function of the buy and sell orders... If buy orders increase current price would increase and if they fall current price would fall and if sell orders increase price would fall and if they fall the stock price would increase... People should buy at current market price and sell at current market price... people's expectations about stock prices increase volatility... if the majority expect lower stock price and set a lower limit price to buy, the stock price would fall and if they expect that price would increase they increase demand and hold supply that increases the stock price... To gain and let everybody gain demand should increase and supply should go down... People may actively manage demand and supply in order to gain; higher stock price would also help promoters...

Long-run is riskier than the short-run, therefore we get higher premium, because the space increases, more time means more uncertainty... The agents may increase supply due to higher interest rate expectations and lower demand and price expectations which could help contain the value... The higher PE ratio means that the stock price is backed by the companies’ earnings and there is no bluff in demand and supply or irrational exuberance... The agents would gain if they buy low and sell high... They could make more money and save more if they buy a product or stock or inventory if its price is low and sell when the prices are high...

The central bank must alert the economy in advance on rate hikes and cuts before the actuals... Higher interest rate expectations could lower demand and price expectations and increase supply and contain the price level and lower interest rate expectations could increase demand and price expectations and lower supply and contain the price level... which would help stabilise interest rate and expectations...

In the last wave we observed that the inflation increased during the lockdown which saw a rationalisation after the unlock... Higher prices/inflation too increased supply and lowered demand which contained the prices... Higher prices increase margin and the excuse to increase prices which increase earnings and the stock prices... We also observed that the stock prices of the large market cap recovered faster than the broader economy that is largely unorganised... Underneath the lockdown the trade continued at higher margins...

Interest Rate and Price Expectations and Spending...

Our models have an underlying flaw that they fail to measure uncertainty and stochastic and exogenous shocks which have resulted in the forecasting errors... 

Rational expectations modeling is also erroneous since we can’t expect everybody to understand the price and demand and supply dynamics in the market... 

The assumption that individuals are rational and have full knowledge is not right and above that the uncertainty and stochastic errors make the modeling redundant and require forward and clear guidance to help manage investments... 

It is the duty of the central bank to educate investors on its actions loud and clear with certainty which would help lower loss... 

The forward guidance may save rate cuts and hikes since people would themselves control investment and spending if inflation crosses 2.5-3% or so... 

Moreover they would increase demand and spending when prices are low and increase supply when prices are high which would help stabilise the price level, too... 

If everybody would follow the central bank we could expect individual be rational and the expectations would be self full-filling...

The inflation and expectations affect the interest rate and expectations and the interest rate and expectations also affect the inflation and expectations or in short both reinforce each other which increase volatility. 

The central bank manages the inflation and expectations by manipulating the interest rate when it shall adjust interest rate expectations in order to carve inflation expectations and stimulate spending and growth. 

The central banks use interest rate to affect price level or inflation/disinflation/deflation expectations to increase spending, nonetheless they increase volatility by adjusting the borrowing cost or interest rate, lower borrowing cost reinforce lower prices and vice versa. 

Though, the real interest rate remains same while adjusting interest rate since nominal interest rate equals real interest rate plus inflation it barely affects spending, but blocks correction through lower real interest rate and higher supply, moreover higher real interest rate also lower demand. 

When the central banks could utilize the interest rate expectations to affect price expectations and spending they vaguely use interest rate to affect prices and demand/supply and spending. 

During high inflation higher interest rate expectations could lower demand and price expectations and increase supply which could control prices whereas during low inflation lower interest rate expectations could increase demand and price expectations and also lower supply.

The central bank must alert the economy in advance on rate hikes and cuts before the actuals... 

Higher interest rate expectations could lower demand and price expectations and increase supply and contain the price level and lower interest rate expectations could increase demand and price expectations and lower supply and contain the price level... which would help stabilise interest rate and expectations...