When the price of a complementary good goes down, the price of the good it is complementary to goes up. If aliens drop free mustard packets on our heads, people will go out and buy hotdogs, driving up the price of hotdogs as mustard gets cheaper.Similarly, I would argue, when governments sell 50-year bonds instead of 30-years, the price of coupons for years 1 through 30 go up. Just like if you make car stereos better, more people will buy cars. Or if you extend a train route from Washington DC to Florida, more people will take the trip from New York to Washington.Then there are byproducts, the price of which goes down when the price of the good they are a byproduct of goes up. When beef consumption goes up, the price of cow ears to be sold as dog chews goes down. When people buy more soybean meal, there is more soybean oil left after the crush, and the price of soybean oil is depressed.So my question is, is it possible to drive down the price of equity, by bidding up the price of bonds? In other words, every time I lend someone money to pursue a certain activity, this creates a residual in the amount of money he will have left after he pays me off. This uncertain quanity is called "equity."If there is a glut of bricks, so I lend someone $100 to buy bricks and build a house, the hoped-for sale profit of the house can now be sold as equity. So by bidding up the price of bonds, and stimulating people to create new bonds to supply me with, do I stimulate at the same time a production of equity, which will drive down the price of stock?Is meeting a demand for bonds from the Federal Reserve similar to meeting a demand for soybean meal from the Federal Reserve? Does it stimulate the production of equity as a byproduct just like soybean oil, and drive down the relative price of stock? Your answer can be pure thought, or include facts and figures from history.

"If there is a glut of bricks, so I lend someone $100 to buy bricks and build a house, the hoped-for sale profit of the house can now be sold as equity. So by bidding up the price of bonds, and stimulating people to create new bonds to supply me with, do I stimulate at the same time a production of equity, which will drive down the price of stock?"From what you have writen equity is the hoped for residual profit of something. If you build more houses there price is expected to go down while the cost of building them goes up. So the profit share for each one should go down and thus your equity price.Taking another view point if you build only with debt and your equity protion reflects only the risk of the project and the expected profit discounted to the present, as the prices of the buildings fall obviously you would not pay as much for the equity claim, but at the same time the discount rate falls and compensates somewhat.You can check that from a stock pricing formula D/i where the falling divident is compensated by the interest rate fall. Thus you can actually get your equity price to go up.That is why I believe there are money in sales - you can find sound arguments for any thesis.

"Is it possible to drive down the price of equity, by bidding up the price of bonds?"=======================================================================Debt can leverage the value of a company. Debt, when wisely used, increases the returns per capital (or the EPS). Higher EPS means higher price for the stock (according to the Keynes model) and higher value for the company. On the other side increasing debt means more risks (credit risks and volatility) for the debtholders and thus higher required returns (and risk premiums). That also means higher financing costs for the company (and bankruptcy risks). Imagine that you are on the top of a skyscraper. You want to admire the view (risk adjusted returns per capital) but if you stay on the edge of the rooftop you may fall down. If however you stay too far from the edge you will hardly see anything...In terms of corporate finance the problem is to find the optimum capital structure (or debt to capital ratio) that maximises the value of the company(minimises the WACC). The optimum capital structure can be approximated with the Black Scholes model. Higher/lower debt than the one when the capital structure is optimum means lower value for the company. Now lets assume that you are not a rational investor and you want to bid the prices of the corporate bonds up even new issue of bonds means higher credit risk. The net result to the value of the firm depends on the positive impact of lower borrowing rates to the negative impact of higher debt. Lower borrowing rates means different optimum capital structure thus the impact of the higher debt may be positive in an interval. Borrowing however over that new optimum structure will finally decrease the value of the firm (assets). The capital structure for that maximises the value to the shareholders is indeed different than that maximises the value to the debtholders. However in a world with taxes and agency costs the maximum value for the equityholder and the maximum value for the debtholders include both equity and debt (in different proportions). That means that we cannot always increase the stock price by increasing the debt.Additionaly bonds and stocks are competitive investments. Low bond yields make people invest in stocks and the opposite. From this aspect bidding up the bond prices will increase and not decrease the value of the stocks. ===============================================================================================So by bidding up the price of bonds, and stimulating people to create new bonds to supply me with, do I stimulate at the same time a production of equity, which will drive down the price of stock?===============================================================================================To answer the second question by bidding up the price of bonds, and stimulating people to create new bonds you MAY stimulate a production of equity (or you may adjust the company's capital structure closer to the optimum). That depends also on the cost of issuing new stock. It is indeed cheaper to continually adjust the capital structures by using different dividend policy, scrip issues and special dividends. Also if you stimulate the production of equity it doesn't mean that the price of the equity will decrease.

Also if you stimulate the production of equity it doesn't mean that the price of the equity will decrease. I agree with DimitriLancs almost entirely.Equity is essentially no different from sub-ordinated debt .... the bottom-most sub-ordination (.. and consequently commands an appropriate "credit risk spread" commensurate with it's riskiness).If Fed starts bidding up the price of the upper layers of the debt ... only the mix of the debt distribution (among upper and lower layers) will change. New projects will sell a lot of bonds (at a quite low yield -- since the Fed is buying indiscriminately) ... the price of the "subordinated debt" i.e. equity will adjust in accordance with the fair value of WACC associated with the business venture.Ceterus Paribus, Fed indiscriminately buying up bonds, will lead to equities also looking up (ability to place cheaper debt or refinancing of existing high cost debt, will boost equities).

QuoteOriginally posted by: bhutesIf Fed starts bidding up the price of the upper layers of the debt ... only the mix of the debt distribution (among upper and lower layers) will change.What do you mean "only?" Certainly the total quantity of debt goes up, since the money supply goes up, compared to what it "would do" IF the Fed didn't bid up debt. Look at Japan. Though I guess if you assume that is not really an "IF" since Fed policy is pretty strictly dictated by inputs, you could look at it a different way. You could say assume a constant growth of the money supply and/or certain price indexes. Is there a strong association between the interest rate, and the relative growth of M3 versus MZM or something?QuoteOriginally posted by: DimitrisLancsOn the other side increasing debt means more risks (credit risks and volatility) for the debtholders and thus higher required returns (and risk premiums). That also means higher financing costs for the company (and bankruptcy risks).I disagree. Assume the same portfolio of visible potential future revenue streams, and the same amount of money raised to meet the same subset with an inventory. An increase in the amount of debt versus equity doesn't increase the total uncertainties surrounding the unchanged future revenues target. It just enables a more optimal allocation of those risks between investors with different preferences, right? And so an increase in debt from a level of zero might decrease the cost to those people who are selling it to raise money. Or, increasing total debt by financing new companies - instead of for example burning fruit in big piles like they did during the Great Depression - does not necessarily increase the risk of loss to owners of existing debt. Or, viewed from the vantage point of a national collective, the debt is a wash sale - as voters with a stake in the government and federal reserve, you short exactly what you buy. But by buying debt and allocating obligations to productive individuals, you have decreased the risk of nobody producing any food or shelter, by enabling specialists to plan and coordinate through the financial system.QuoteOriginally posted by: DimitrisLancsNow lets assume that you are not a rational investor and you want to bid the prices of the corporate bonds up even new issue of bonds means higher credit risk.In the specific case of the Fed, you are hard-coding credit risk in the contract, by simply demanding a lower interest rate. There's not a risk of them missing the last 2% of the coupon, there's a certainty you'll never see it.QuoteOriginally posted by: DimitrisLancsThe capital structure for that maximises the value to the shareholders is indeed different than that maximises the value to the debtholders.But we are assuming both of those to be optimized or maximized, within the constraints of either Fed policy, and/or some "independent" variable in the form of aliens who fly in on spaceships filled with consumer goods. In other words, for the same set of known immediate investment opportunities, there will be two alternative optimal (or best doable) capital structures - one if the aliens fly down our chimneys with gifts, and an alternative one if they don't. Assume we optimize the level of debt and equity whichever happens. We're not arbitrarily moving our leverage away from what makes sense to us, just to see what happens. We don't know what the Fed is going to do, because there is uncertainty in the universe, and we can even pretend that the aliens are the source of these surprises.So let's suppose either the Fed, or a very successful counterfeiter, starts buying risk-free bonds like crazy. As your arbitrage takes place, and the supply of risk-free bonds doesn't change, the sellers of those bonds will buy new bonds, or cause new risky bonds to come into existence. There will be both 1) equity holders who are residual claimants on existing revenue streams selling more debt (or borrowing to finance immediate consumption), and 2) new future revenue streams brought into existence, meaning new equity created. This new future wealth, which didn't exist a minute earlier, could be created to the extent the bills held by consumers are rendered worthless by the counterfeiter. If they were about to buy an apple for $1, he says I'll lend $1,000 to anybody to buy an apple for $1,000 and plant the seeds, so that immediate consumption is foregone to create future wealth.We can simplify this by assuming extremes. All immediate consumption is diverted in favor of increasing future wealth. At the resulting high expected rate of inflation, and low interest rate at which the debt is sold, all borrowers assume that the loony single lender will end up with close to 0% claim on the future wealth pie. All the debt is in the hands of the looney single lender, all the equity is in the hands of the rest of the population. The real inflation-adjusted value of that equity is greater than it would have been had the lender not forced them all to switch out of cash and into commodities or production capacity by borrowing. These individuals now have 100 apples expected tomorrow (after they pay their debts) and zero today. Meaning the rate at which they are willing to trade an apple tomorrow for an apple today has gone down. Therefore, if through some incredible machinations immediate prices are held constant (or if holding prices constant is the goal, this is the byproduct, and the crzay new rate of inflation is actually the target rate) the price of stock today in dollars will go down.In other words, suppose we were to maintain a constant level of consumption, and a constant level of prices, in the face of a huge explosion in production. The extra production would have to be diverted to investment in future production, causing the immediate supply of goods for future delivery to increase, and the prices of future goods to drop, relative to the immediate prices of immediate goods. So if the Fed came along and said "We have a printing press that says we own all this extra production, beyond the amount we have to let go to keep consumer prices capped. We're going to hire all you people to invest it in production of goods which goods we can print more money to hire you to invest next year. And we're going to hire you to do it at a price which will leave you with a huge profit next year. You are going to have to go out and find a pattern of things to use it to build, which pattern you weren't aware of yesterday." The prices of individual future revenue streams - meaning of stocks with static future revenues - would drop.In other words, the total supply of future goods relative to immediate goods is higher when interest rates are higher. But whatever the supply of future goods relative to current goods - whatever the visible portfolio of potential future sales opportunities which can be brought into existence through investment - that supply increases when 1) the Fed lowers rates, and 2) that Fed action is a surprise. So recognition, by the Fed, of a glut of immediate goods - which is already felt in their prices - results in an unexpected increase in the supply of future goods, and a drop in the price per good. The Fed doesn't let the price of immediate goods drop, because they have consumer price targets. Instead, they re-route the excess goods to the future by investing, and cause the price of investments to drop.Because the Fed's goal is not to make money, and so the relative supplies of investments to immediate production are not driven by price signals, or something. People don't sell bonds and buy stock, they sell bonds and make stock, because making stock is what monetary policy is designed to get them to do. And people have their own demands for consumption and investment which move opposite from the demands implied in Fed signals. When the Fed prints money to buy bonds, people don't suddenly have more goods, and therefore demand more investment. They already wanted to invest, they just couldn't do it until the Fed moved prices to where the price expectations of lenders and borrowers all reconciled, and capital could form. When the Fed hasn't printed the money to move prices how investors expect them to move, either borrowers won't borrow, or lenders won't lend. And before the Fed lowers rates, people already have goods, the Fed just increases the dollar price which they pay to consume the same amount of goods, or decreases the goods available to consumption by hiring people to invest.And so when interest rates drop, stocks go down, and when interest rates rise unexpectedly - meaning when interest rates for specific terms go up, rather than time simply passing into anticipated higher-rate periods (and so people invest less than they thought they would, but consumer prices remain constant) - stocks go up!Now I just have to go to the data, and see if my theory lines up...