Stocks are NOT an inflation hedge

[pecunia]

Why are we giving equal consideration to the effects of deflation - something that has happened in only 3 or 4 of the last 300 quarters (i.e. is short lived and historically has occurred ~1% of the time)?
For the US one would have to go back to the 1930s to encounter an entire year that was deflationary.

The theory is that the U.S. is no longer growing its population like it did in the 20th century. Demographically the country is aging which reduces monetary velocity, and massive wealth inequality means most dollars are never circulated in a year and instead crowd into bubble investments. Put all that together (and tie a property bubble bow on top) and you have a Japan scenario. One has to admit the undertow is massive if we're holding unemployment under 4% with 2.5% 10 year treasury rates, record-low savings rates, decent consumer spending growth, ... and somehow inflation is still running at 2%. If that undertow increased even a tiny amount, we would be at ZIRP printing dollars like the Japanese are printing yen trying to escape deflationary gravity.

So,.....it sounds like if Federal policies were changed to spread the wealth around a bit, it would provide less risk of a potential  stagnant economy.

[bacchi]

Why are we giving equal consideration to the effects of deflation - something that has happened in only 3 or 4 of the last 300 quarters (i.e. is short lived and historically has occurred ~1% of the time)?
For the US one would have to go back to the 1930s to encounter an entire year that was deflationary.

The theory is that the U.S. is no longer growing its population like it did in the 20th century. Demographically the country is aging which reduces monetary velocity, and massive wealth inequality means most dollars are never circulated in a year and instead crowd into bubble investments. Put all that together (and tie a property bubble bow on top) and you have a Japan scenario. One has to admit the undertow is massive if we're holding unemployment under 4% with 2.5% 10 year treasury rates, record-low savings rates, decent consumer spending growth, ... and somehow inflation is still running at 2%. If that undertow increased even a tiny amount, we would be at ZIRP printing dollars like the Japanese are printing yen trying to escape deflationary gravity.

So,.....it sounds like if Federal policies were changed to spread the wealth around a bit, it would provide less risk of a potential  stagnant economy.

And that a younger, growing, population would also help.

[vand]

I love this chart from pensioncraft's (a channel I highly recommend, especially for UK investors) video on inflation vs deflation, and why everyone shoots for a 2% inflation target to maximize asset pricing:

[Buffaloski Boris]

I love this chart from pensioncraft's (a channel I highly recommend, especially for UK investors) video on inflation vs deflation, and why everyone shoots for a 2% inflation target to maximize asset pricing:

Thanks for the video idea.  One more thing on my info stack! 

[vand]

bumpity bump bump

[ender]

I don't understand this thread.

"stocks not inflation hedge" yet the first post has a graphic showing how stocks provide real returns even in inflationary environments.

[nereo]

I don't understand this thread.

"stocks not inflation hedge" yet the first post has a graphic showing how stocks provide real returns even in inflationary environments.

I've never been more happy to have a fixed, low-rate 30y mortgage. It was a very deliberate decision.

[Mr. Green]

Maybe my simpleton view is too simple for reality but I just assumed stocks have to be a decent inflation hedge because they're valued by the thing getting inflated - dollars. Increased costs = increased profits = record profits = high company valuations = strong stock performance (eventually). I know the market can decouple itself from reality and does so quite frequently but I feel like eventually if inflation runs long enough and stocks don't rise accordingly people look around and say, "fuck, these stocks are cheap!" And then we're off to the races again. At a very basic level is this not how it inevitably plays out?

[pecunia]

Maybe my simpleton view is too simple for reality but I just assumed stocks have to be a decent inflation hedge because they're valued by the thing getting inflated - dollars. Increased costs = increased profits = record profits = high company valuations = strong stock performance (eventually). I know the market can decouple itself from reality and does so quite frequently but I feel like eventually if inflation runs long enough and stocks don't rise accordingly people look around and say, "fuck, these stocks are cheap!" And then we're off to the races again. At a very basic level is this not how it inevitably plays out?

Yeh - However, if they were inflated already as many said they were, it will take a long time for them to rise to previous levels.  They may simply settle to a lower value.  Baby Boomers were pumping a lot of money into stocks as there is no other place for retirement money.  This drove the prices up.  In addition, corporations put tax windfalls into the stocks.  A lot of baby boomers are retiring.  This removes one of the inputs.  I'm not sure about corporations, but they may be actually investing in real assets such as plant expansions instead of buying back their stocks.  They may be down a while.  Smart people tell me we are due for a recession.

[PDXTabs]

Maybe my simpleton view is too simple for reality but I just assumed stocks have to be a decent inflation hedge because they're valued by the thing getting inflated - dollars. Increased costs = increased profits = record profits = high company valuations = strong stock performance (eventually). I know the market can decouple itself from reality and does so quite frequently but I feel like eventually if inflation runs long enough and stocks don't rise accordingly people look around and say, "fuck, these stocks are cheap!" And then we're off to the races again. At a very basic level is this not how it inevitably plays out?

Yes, but that ignores that if rates go up stocks go down because the risk-free return of US treasuries goes up which will push down multiple expansion. Or at least that's the conventional wisdom.

[wageslave23]

Maybe my simpleton view is too simple for reality but I just assumed stocks have to be a decent inflation hedge because they're valued by the thing getting inflated - dollars. Increased costs = increased profits = record profits = high company valuations = strong stock performance (eventually). I know the market can decouple itself from reality and does so quite frequently but I feel like eventually if inflation runs long enough and stocks don't rise accordingly people look around and say, "fuck, these stocks are cheap!" And then we're off to the races again. At a very basic level is this not how it inevitably plays out?

I think that is true on one level, the other part is that if inflation causes yields to rise on bonds, then people start shifting money to bonds and out of stocks.  Over the previous few years there was no alternative to stocks because everything was overpriced and yields were terrible all around.  I used to work for a property investment company and they would sell for 3 or 4% cap rate, meaning buyers could expect 3 or 4% roi. I asked  the owner of our company why people would accept that low of roi, he said because there's nowhere else to put money.  Same thing with stocks.

[Telecaster]

Maybe my simpleton view is too simple for reality but I just assumed stocks have to be a decent inflation hedge because they're valued by the thing getting inflated - dollars. Increased costs = increased profits = record profits = high company valuations = strong stock performance (eventually). I know the market can decouple itself from reality and does so quite frequently but I feel like eventually if inflation runs long enough and stocks don't rise accordingly people look around and say, "fuck, these stocks are cheap!" And then we're off to the races again. At a very basic level is this not how it inevitably plays out?

That's pretty much correct.   Stock prices are ultimately tied to corporate earnings, and over any reasonable period of time  corporate earnings are adjusted pretty much in lock step with inflation.   The exception for high rates of inflation because companies have a hard time raising prices fast enough.  But we're not there yet. 

[ChpBstrd]

Maybe my simpleton view is too simple for reality but I just assumed stocks have to be a decent inflation hedge because they're valued by the thing getting inflated - dollars. Increased costs = increased profits = record profits = high company valuations = strong stock performance (eventually). I know the market can decouple itself from reality and does so quite frequently but I feel like eventually if inflation runs long enough and stocks don't rise accordingly people look around and say, "fuck, these stocks are cheap!" And then we're off to the races again. At a very basic level is this not how it inevitably plays out?

That's pretty much correct.   Stock prices are ultimately tied to corporate earnings, and over any reasonable period of time  corporate earnings are adjusted pretty much in lock step with inflation.   The exception for high rates of inflation because companies have a hard time raising prices fast enough.  But we're not there yet.

Yea, but it appears retail price hikes are trailing behind the growth of producer prices. That gap you see is the "stickiness" of prices. I suspect CPI will have to rise to meet PPI unless the prices of commodities and labor collapse.

[PDXTabs]

Maybe my simpleton view is too simple for reality but I just assumed stocks have to be a decent inflation hedge because they're valued by the thing getting inflated - dollars. Increased costs = increased profits = record profits = high company valuations = strong stock performance (eventually). I know the market can decouple itself from reality and does so quite frequently but I feel like eventually if inflation runs long enough and stocks don't rise accordingly people look around and say, "fuck, these stocks are cheap!" And then we're off to the races again. At a very basic level is this not how it inevitably plays out?

That's pretty much correct.   Stock prices are ultimately tied to corporate earnings, and over any reasonable period of time  corporate earnings are adjusted pretty much in lock step with inflation.   The exception for high rates of inflation because companies have a hard time raising prices fast enough.  But we're not there yet.

Yea, but it appears retail price hikes are trailing behind the growth of producer prices. That gap you see is the "stickiness" of prices. I suspect CPI will have to rise to meet PPI unless the prices of commodities and labor collapse.

I think that it is reasonable to expect commodities to come down some as supply chains get sorted out (but not necessarily this year). Check out lumber.

[vand]

Maybe my simpleton view is too simple for reality but I just assumed stocks have to be a decent inflation hedge because they're valued by the thing getting inflated - dollars. Increased costs = increased profits = record profits = high company valuations = strong stock performance (eventually). I know the market can decouple itself from reality and does so quite frequently but I feel like eventually if inflation runs long enough and stocks don't rise accordingly people look around and say, "fuck, these stocks are cheap!" And then we're off to the races again. At a very basic level is this not how it inevitably plays out?

The problem is that stocks valuations always get derated when inflation is high.

If your money is going to lose 10% in purchasing power each year, then for an investment (be it a stock, bond, or real estate) to make sense it has to have a rate of return of at least that much, and the easiest way for that to happen is for their price to earnings multiple to come down.

[Mr. Green]

Maybe my simpleton view is too simple for reality but I just assumed stocks have to be a decent inflation hedge because they're valued by the thing getting inflated - dollars. Increased costs = increased profits = record profits = high company valuations = strong stock performance (eventually). I know the market can decouple itself from reality and does so quite frequently but I feel like eventually if inflation runs long enough and stocks don't rise accordingly people look around and say, "fuck, these stocks are cheap!" And then we're off to the races again. At a very basic level is this not how it inevitably plays out?

The problem is that stocks valuations always get derated when inflation is high.

If your money is going to lose 10% in purchasing power each year, then for an investment (be it a stock, bond, or real estate) to make sense it has to have a rate of return of at least that much, and the easiest way for that to happen is for their price to earnings multiple to come down.

That would be the point where people find them to be bargains and pile back in, no? Persistent high inflation is not going to drive stock prices toward zero while companies are producing billions of dollars in profit.

[pecunia]

Maybe my simpleton view is too simple for reality but I just assumed stocks have to be a decent inflation hedge because they're valued by the thing getting inflated - dollars. Increased costs = increased profits = record profits = high company valuations = strong stock performance (eventually). I know the market can decouple itself from reality and does so quite frequently but I feel like eventually if inflation runs long enough and stocks don't rise accordingly people look around and say, "fuck, these stocks are cheap!" And then we're off to the races again. At a very basic level is this not how it inevitably plays out?

The problem is that stocks valuations always get derated when inflation is high.

If your money is going to lose 10% in purchasing power each year, then for an investment (be it a stock, bond, or real estate) to make sense it has to have a rate of return of at least that much, and the easiest way for that to happen is for their price to earnings multiple to come down.

That would be the point where people find them to be bargains and pile back in, no? Persistent high inflation is not going to drive stock prices toward zero while companies are producing billions of dollars in profit.

This article says growth is not to be strong and stock prices may not do so well.  Posts above and this linked article says good times for bonds are upon us.  They seem to all avoid the link to high oil prices.  High oil prices seem to make everything go to the doghouse.  I've never seen gasoline prices this high.  More money spent on gas means less money for everything else.  I'm still sitting tight with my index funds.

https://www.barrons.com/articles/stock-bond-market-inflation-1970s-51651701859

[BicycleB]

Maybe my simpleton view is too simple for reality but I just assumed stocks have to be a decent inflation hedge because they're valued by the thing getting inflated - dollars. Increased costs = increased profits = record profits = high company valuations = strong stock performance (eventually). I know the market can decouple itself from reality and does so quite frequently but I feel like eventually if inflation runs long enough and stocks don't rise accordingly people look around and say, "fuck, these stocks are cheap!" And then we're off to the races again. At a very basic level is this not how it inevitably plays out?

The problem is that stocks valuations always get derated when inflation is high.

If your money is going to lose 10% in purchasing power each year, then for an investment (be it a stock, bond, or real estate) to make sense it has to have a rate of return of at least that much, and the easiest way for that to happen is for their price to earnings multiple to come down.

That would be the point where people find them to be bargains and pile back in, no? Persistent high inflation is not going to drive stock prices toward zero while companies are producing billions of dollars in profit.

Last time it took a while for that to happen. 5 to 8 years if you measure just the peak inflation period and perhaps the decisive recession, 1973 through early 1980s.

But about 17 years if you measure from point where stock prices adjusted for inflation started falling, or at least rising less than normal, I think. IIRC that's why 1965 and 1966 were two of the worst years to FIRE ever.  "Piling in" took a while too; the later peak was another 17 years or more, 35+ years after the decline began. 

[chevy1956]

My take is stocks are the only asset that are going to grow long tern. They have to be the bedrock of your portfolio. All other assets in your portfolio are just to protect against times when stocks don't do well.

I can't see this reality ever changing.

I suppose the other assets allow you to sleep at night.

There are other tricks to make your sleep at night though. I for instance have marked down my actual portfolio way below market value. I re-evaluate every financial year (which for is 30th June). So last week I input the actual stock value and sure enough my portfolio has gone up 100k.

Then I think about the guy I saw on the news living in a hovel in Afghanistan when an earthquake hit and killed his 3 kids or the people getting bombed and women raped in the Ukraine.

I'm not worried one little bit about a little bit about my portfolio dropping a bit even though I'm retired.