Author Topic: Do you expect inflation?  (Read 3552 times)

remizidae

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Do you expect inflation?
« on: May 28, 2020, 04:35:27 PM »
I'm concerned that all this giving out free money and running up national and state government debts will lead to inflation. On the other hand, I've heard other commentators argue that we should expect deflation, because people are losing income (or afraid of losing income) and it may take a while for consumer spending to recover.

If you do expect inflation, what would you do to mitigate that risk? I'm pretty concerned that my income is more sticky than prices are. If you were on the fence about the buy vs. rent decision, would inflationary expectations tip you over into buying?

maizefolk

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Re: Do you expect inflation?
« Reply #1 on: May 28, 2020, 05:12:34 PM »
I expect we'll see inflation and/or deflation. Or maybe things will stay the same although that seems less likely.

I think you are right about incomes being stickier than prices, so deflation is likely to be a good thing on a personal level even as it is bad for the economy (unless it gets bad enough for the economy that you lose your job, then it's bad all around). So personally I'm not doing anything to prepare for deflation (beyond being sure to have an emergency fund that would support me if I lost my job or was furloughed) even though I think it could happen.

For inflation I'm not sure there is a lot one can do. One big point you bring up is the decision to rent vs buy. If you're right at the margin where either would work out about equally well this can be a good one but usually other more concrete factors end up dictating which choice will work for a given person, rather than our best guesses about the future value of the dollar.

The biggest thing to make sure you'll be resilient to inflation, if it happens, which is might or might not, is to just make sure you don't have too much of your portfolio in long term bonds or CDs. Stocks can be hurt by inflation in the short term, but will retain their value long term. Bonds also get hit by inflation, but unlike stocks an investment in low interest rate bonds doesn't ever bounce back once they lose value as a result of rising inflation. Even the principle itself ends up worth a lot less in real (as opposed to nominal) dollars.

Retire-Canada

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Re: Do you expect inflation?
« Reply #2 on: May 28, 2020, 06:32:16 PM »
If you do expect inflation, what would you do to mitigate that risk? I'm pretty concerned that my income is more sticky than prices are. If you were on the fence about the buy vs. rent decision, would inflationary expectations tip you over into buying?

The two things I do to hedge against inflation are 1) hold a significant mortgage and 2) hold a significant % of my NW in equities. Well really there is a 3rd thing and that's a spending level that's low relative to my income/assets so that inflation doesn't affect me a lot to begin with.

Personally I have no idea what will happen in the short term due to COVID relieg programs, but over the 50 years of my retirement I expect there will be a period with significant inflation.

Inflation risk is definitely something that points in favour of buying a home with mortgage

vand

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Re: Do you expect inflation?
« Reply #3 on: May 29, 2020, 09:13:46 AM »
The nature of inflation has shown that it is very difficult to predict when it will spike or how long it will last, at least in developed economies. Economic models don't deal with this sort of thing well at all, and I don't think you can find a single economist who has a good track record in predicting inflation.

As such I tend to accept the view of the long term bond market in that that doesn't see it as a particular risk right now. If and when long term bond yields start moving substantially higher then that can be interpreted as the markets pricing in higher inflation, but right now it just isn't on the horizon.

The potential for inflation is always there, with all the debt monetisation going on surely there will be a day of reckoning for these currencies. But up until now all the new currency created has successfully been directed into inflating asset prices rather than consumer prices. When it will show up in your shopping basket is impossible to say.
« Last Edit: May 29, 2020, 09:16:16 AM by vand »

American GenX

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Re: Do you expect inflation?
« Reply #4 on: May 29, 2020, 09:39:14 AM »

I fully expect it to continue and probably get worse.  My personal inflation has always been higher than the government figures, and lately, it's even higher!

I'm still doing what I've always done - diversified investing, trying to keep up with ever rising costs.

waltworks

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Re: Do you expect inflation?
« Reply #5 on: May 29, 2020, 10:49:04 AM »
Let's say you do expect inflation. What are you going to change?

Bad stuff:
-Cash stuffed in mattress.
-Very long term CDs, bonds.

Good stuff:
-Low interest (ie mortgage) debt
-Equities (if you just expect inflation in the US, bias toward int'l)
-Commodities (or precious metals, if you're into that sort of thing)
-Real estate

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traveler

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Re: Do you expect inflation?
« Reply #6 on: May 29, 2020, 01:45:33 PM »
Good stuff:
-Low interest (ie mortgage) debt

Not sure I follow that one. Why is low interest debt good given inflation?

waltworks

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Re: Do you expect inflation?
« Reply #7 on: May 29, 2020, 02:34:22 PM »
Good stuff:
-Low interest (ie mortgage) debt

Not sure I follow that one. Why is low interest debt good given inflation?

Simple, your mortgage payment stays the same, but the value of the money you use to pay it goes way down.

-W

hodedofome

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Re: Do you expect inflation?
« Reply #8 on: May 29, 2020, 04:59:52 PM »
The nature of inflation has shown that it is very difficult to predict when it will spike or how long it will last, at least in developed economies. Economic models don't deal with this sort of thing well at all, and I don't think you can find a single economist who has a good track record in predicting inflation.

As such I tend to accept the view of the long term bond market in that that doesn't see it as a particular risk right now. If and when long term bond yields start moving substantially higher then that can be interpreted as the markets pricing in higher inflation, but right now it just isn't on the horizon.

The potential for inflation is always there, with all the debt monetisation going on surely there will be a day of reckoning for these currencies. But up until now all the new currency created has successfully been directed into inflating asset prices rather than consumer prices. When it will show up in your shopping basket is impossible to say.

Good post right here.

hodedofome

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Re: Do you expect inflation?
« Reply #9 on: May 29, 2020, 05:02:58 PM »
Iíll go ahead and make a prediction even though I just upvoted a post that itís mostly unpredictable :).

Developed economies have been printing and spending out the yin yang since Ď08, and inflation has been pretty muted for the most part. I wouldnít worry about it. If it finally starts we have a LOT of raises we could do to interest rates to temper down the inflation and still not get rates out of line with historical norms.

Iím not worried about inflation at all. Iíd be more worried about deflation with the developed world not having enough babies to grow like the past.

Buffaloski Boris

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Re: Do you expect inflation?
« Reply #10 on: May 31, 2020, 07:39:39 AM »
Speaking for myself, I think there is a higher risk of deflation than inflation in the short and medium term.  Long term, who knows?  Economists and markets have been really, really bad at predicting this stuff.  Astrologers do better.  The example I'd look to is Japan.  Their national debt as a percentage of GDP is over twice that of the US.  They've been trying to cause some level of inflation for years and can't seem to do so.  Again, speaking for myself, I think inflation is more of a supply issue than demand.  Times when we've had significant inflation have been due more to supply disruptions such as with oil in the 1970s. 

How to respond to it in my view is pretty much the same way you respond to any economic unknown: diversification.  Own a little bit of everything across asset classes and countries.  Diversify like mad. Diversify in the morning.  Diversify in your sleep. Buy, hold, and hopefully sell higher a decade or more later.   

PDXTabs

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Re: Do you expect inflation?
« Reply #11 on: May 31, 2020, 08:29:05 AM »
We are already seeing inflation for products with disrupted supply chains and/or are in high demand like food, electronics, and bicycles.

But I suspect that we will see deflation for products that people no longer need (cars?).

However, when the economists go to measure inflation/deflation they lump everything together. It is entirely possible that on the macro level we won't see any noticeable inflation or deflation.
« Last Edit: May 31, 2020, 10:20:53 PM by PDXTabs »

js82

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Re: Do you expect inflation?
« Reply #12 on: May 31, 2020, 09:12:51 AM »
I'm concerned that all this giving out free money and running up national and state government debts will lead to inflation. On the other hand, I've heard other commentators argue that we should expect deflation, because people are losing income (or afraid of losing income) and it may take a while for consumer spending to recover.

If you do expect inflation, what would you do to mitigate that risk? I'm pretty concerned that my income is more sticky than prices are. If you were on the fence about the buy vs. rent decision, would inflationary expectations tip you over into buying?

Inflation is a tricky subject, because it depends not only how fast Uncle Jerome is running his money printer, but on the velocity of money, and *who* gets that money.  It also depends on how you define inflation.

Typically inflation is defined via the CPI, which is based on consumer goods.  Like everything else, prices are impacted by supply and demand,

If you print a bunch of money and give it to wealthy financial institutions it doesn't necessarily impact CPI, because trickle down doesn't actually work, and it mostly serves to buoy asset prices rather than get money to consumers.  Unless that money makes its way to consumers in a manner that affects supply/demand for consumer goods, you won't really see a change in CPI.

I think there's inflation that will happen at the asset level - that's why markets are only off 10% despite where the global economy is currently sitting.  I just don't think most of that inflation will work its way down to consumer goods.  This is symptomatic of the state of the modern economy, where the fortunes of Wall Street and Main Street are becoming increasingly decoupled.

vand

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Re: Do you expect inflation?
« Reply #13 on: May 31, 2020, 02:08:36 PM »
I'm not convinced by the deflationist argument either.. Everyone always points to Japan.. but that is the only real example of a real sustained deflationary environment in the global fiat currency era since 1971. I don't really consider those -1% dips in inflation after the economy has imploded in countries like Ireland & Iceland to be real deflation, merely a collapsed boom where prices have corrected back to more realistic levels.

The weight of historical evidence shows that far, far more economies have suffered from destructive inflationary periods than from deflationary periods.  Maybe I'm cynical, but I think the people with their fingers on the printing presses like to tout the deflationary threat so that it gives them excuse to not even bother with any fiscal restraint.
« Last Edit: May 31, 2020, 02:11:39 PM by vand »

effigy98

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Re: Do you expect inflation?
« Reply #14 on: May 31, 2020, 05:06:15 PM »
Stimulus for poor people will cause inflation, business only bailouts, deflation. Either way middle is F'd. Balance portfolio around fed actions and should be fine. Don't use fundementals or tradional methods. Try not to be stuck in the middle as you will be taken advantage of.

Sent from my Pixel 3a using Tapatalk
« Last Edit: May 31, 2020, 05:08:02 PM by effigy98 »

Buffaloski Boris

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Re: Do you expect inflation?
« Reply #15 on: May 31, 2020, 09:00:50 PM »
I'm not convinced by the deflationist argument either.. Everyone always points to Japan.. but that is the only real example of a real sustained deflationary environment in the global fiat currency era since 1971. I don't really consider those -1% dips in inflation after the economy has imploded in countries like Ireland & Iceland to be real deflation, merely a collapsed boom where prices have corrected back to more realistic levels.

The weight of historical evidence shows that far, far more economies have suffered from destructive inflationary periods than from deflationary periods.  Maybe I'm cynical, but I think the people with their fingers on the printing presses like to tout the deflationary threat so that it gives them excuse to not even bother with any fiscal restraint.

@vand Iíve been thinking about your post. And coincidentally. I just listened to the latest MoneyWeek podcast that interviewed James Ferguson. He had some very interesting things to say about inflation. Basically, he expects it. Worth a listen if you havenít already done so.

oldladystache

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Re: Do you expect inflation?
« Reply #16 on: May 31, 2020, 10:17:59 PM »
I've been expecting it for years.

vand

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Re: Do you expect inflation?
« Reply #17 on: June 01, 2020, 08:56:30 AM »
I'm not convinced by the deflationist argument either.. Everyone always points to Japan.. but that is the only real example of a real sustained deflationary environment in the global fiat currency era since 1971. I don't really consider those -1% dips in inflation after the economy has imploded in countries like Ireland & Iceland to be real deflation, merely a collapsed boom where prices have corrected back to more realistic levels.

The weight of historical evidence shows that far, far more economies have suffered from destructive inflationary periods than from deflationary periods.  Maybe I'm cynical, but I think the people with their fingers on the printing presses like to tout the deflationary threat so that it gives them excuse to not even bother with any fiscal restraint.

@vand Iíve been thinking about your post. And coincidentally. I just listened to the latest MoneyWeek podcast that interviewed James Ferguson. He had some very interesting things to say about inflation. Basically, he expects it. Worth a listen if you havenít already done so.

I did listen to it, cheers. Actually I had listened to the first half already which wasn't that interesting, but glad I went back for the 2nd half which is much more interesting.

James Ferguson is obviously a very sharp guy. I agree with him that the risks today with both a dramatic increase in money supply coupled with a sharp drop in production is traditionally the ingredients of secular inflation. However as he's also said, money velocity has dropped sharply too.. it remains to be seen how it bounces.. but the trend has been that Mv has been trending down for a long time now..

.. all of which rather reinforces my view that predicting inflation is really, really hard. But in investment terms that might not really matter, because there is not really much cost to hedging your portfolio for inflation, while neglecting to do so and then being caught out seems like paying the price for neglecting to take up the option of cheap insurance.

Buffaloski Boris

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Re: Do you expect inflation?
« Reply #18 on: June 01, 2020, 10:58:12 AM »
I'm not convinced by the deflationist argument either.. Everyone always points to Japan.. but that is the only real example of a real sustained deflationary environment in the global fiat currency era since 1971. I don't really consider those -1% dips in inflation after the economy has imploded in countries like Ireland & Iceland to be real deflation, merely a collapsed boom where prices have corrected back to more realistic levels.

The weight of historical evidence shows that far, far more economies have suffered from destructive inflationary periods than from deflationary periods.  Maybe I'm cynical, but I think the people with their fingers on the printing presses like to tout the deflationary threat so that it gives them excuse to not even bother with any fiscal restraint.

@vand Iíve been thinking about your post. And coincidentally. I just listened to the latest MoneyWeek podcast that interviewed James Ferguson. He had some very interesting things to say about inflation. Basically, he expects it. Worth a listen if you havenít already done so.

I did listen to it, cheers. Actually I had listened to the first half already which wasn't that interesting, but glad I went back for the 2nd half which is much more interesting.

James Ferguson is obviously a very sharp guy. I agree with him that the risks today with both a dramatic increase in money supply coupled with a sharp drop in production is traditionally the ingredients of secular inflation. However as he's also said, money velocity has dropped sharply too.. it remains to be seen how it bounces.. but the trend has been that Mv has been trending down for a long time now..

.. all of which rather reinforces my view that predicting inflation is really, really hard. But in investment terms that might not really matter, because there is not really much cost to hedging your portfolio for inflation, while neglecting to do so and then being caught out seems like paying the price for neglecting to take up the option of cheap insurance.

I agree. The jawboning on the pandemic didnít much do it for me. I was cooking dinner as I listened so I just let it go. It was the second part that made my ears perk right on up.

What are you thinking about as insurance? PMs? Iím rotating out of cash and into international equities.  Basically lower prices and diversification of USD exposure. I guess I could do some more PMs although I think the Au train has likely left the station. Maybe Ag.

clarkfan1979

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Re: Do you expect inflation?
« Reply #19 on: June 02, 2020, 12:42:38 AM »
Deflation can happen, but doesn't it only last for a very short time? Considering that the United States continues to print money during a recession, it's not surprising that assets increase in value. Not based on real productivity, but by a ton of inflation.

I teach community college. My salary is going to get crushed by inflation over the next 10 years. To deal with that, I will buy rental house number #4 and #5 with low mortgage debt (<5%).

vand

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Re: Do you expect inflation?
« Reply #20 on: June 02, 2020, 02:07:44 AM »
I'm not convinced by the deflationist argument either.. Everyone always points to Japan.. but that is the only real example of a real sustained deflationary environment in the global fiat currency era since 1971. I don't really consider those -1% dips in inflation after the economy has imploded in countries like Ireland & Iceland to be real deflation, merely a collapsed boom where prices have corrected back to more realistic levels.

The weight of historical evidence shows that far, far more economies have suffered from destructive inflationary periods than from deflationary periods.  Maybe I'm cynical, but I think the people with their fingers on the printing presses like to tout the deflationary threat so that it gives them excuse to not even bother with any fiscal restraint.

@vand Iíve been thinking about your post. And coincidentally. I just listened to the latest MoneyWeek podcast that interviewed James Ferguson. He had some very interesting things to say about inflation. Basically, he expects it. Worth a listen if you havenít already done so.

I did listen to it, cheers. Actually I had listened to the first half already which wasn't that interesting, but glad I went back for the 2nd half which is much more interesting.

James Ferguson is obviously a very sharp guy. I agree with him that the risks today with both a dramatic increase in money supply coupled with a sharp drop in production is traditionally the ingredients of secular inflation. However as he's also said, money velocity has dropped sharply too.. it remains to be seen how it bounces.. but the trend has been that Mv has been trending down for a long time now..

.. all of which rather reinforces my view that predicting inflation is really, really hard. But in investment terms that might not really matter, because there is not really much cost to hedging your portfolio for inflation, while neglecting to do so and then being caught out seems like paying the price for neglecting to take up the option of cheap insurance.

I agree. The jawboning on the pandemic didnít much do it for me. I was cooking dinner as I listened so I just let it go. It was the second part that made my ears perk right on up.

What are you thinking about as insurance? PMs? Iím rotating out of cash and into international equities.  Basically lower prices and diversification of USD exposure. I guess I could do some more PMs although I think the Au train has likely left the station. Maybe Ag.

Yeah, no big secrets here. Hold assets that cannot be conjured out of thin and diversify awayfrom your local currency. Holding a mortgage is, incidentally, a roundabout way of using your future income to short your local currency, which is why traditionally mortgage holders have benefitted from ongoing inflation that has eroded away their debt..

mrmoonymartian

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Re: Do you expect inflation?
« Reply #21 on: June 02, 2020, 02:36:33 AM »
Nobody expects the Spanish inflation.

vand

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Re: Do you expect inflation?
« Reply #22 on: June 02, 2020, 05:19:30 AM »
Iíll go ahead and make a prediction even though I just upvoted a post that itís mostly unpredictable :).

Developed economies have been printing and spending out the yin yang since Ď08, and inflation has been pretty muted for the most part. I wouldnít worry about it. If it finally starts we have a LOT of raises we could do to interest rates to temper down the inflation and still not get rates out of line with historical norms.

Iím not worried about inflation at all. Iíd be more worried about deflation with the developed world not having enough babies to grow like the past.

The problem is that with the amount of indebtedness in all developed economies today they would not be able to service the debt if/when inflation does rear its head and central banks were forced to raise rates to anywhere near historic norms. That is an option that is simply not on the table.


talltexan

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Re: Do you expect inflation?
« Reply #23 on: June 02, 2020, 08:29:22 AM »
Iíll go ahead and make a prediction even though I just upvoted a post that itís mostly unpredictable :).

Developed economies have been printing and spending out the yin yang since Ď08, and inflation has been pretty muted for the most part. I wouldnít worry about it. If it finally starts we have a LOT of raises we could do to interest rates to temper down the inflation and still not get rates out of line with historical norms.

Iím not worried about inflation at all. Iíd be more worried about deflation with the developed world not having enough babies to grow like the past.

The problem is that with the amount of indebtedness in all developed economies today they would not be able to service the debt if/when inflation does rear its head and central banks were forced to raise rates to anywhere near historic norms. That is an option that is simply not on the table.

Inflation also reduces the real value of the debt, and that impact happens more rapidly than the monetary policy you're describing.

Buffaloski Boris

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Re: Do you expect inflation?
« Reply #24 on: June 02, 2020, 10:25:07 AM »
Nobody expects the Spanish inflation.

Our *three* weapons are monetization, quantitative easing, debt purchases, and an almost fanatical devotion to central banking policy....

vand

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Re: Do you expect inflation?
« Reply #25 on: June 02, 2020, 11:40:50 AM »
Iíll go ahead and make a prediction even though I just upvoted a post that itís mostly unpredictable :).

Developed economies have been printing and spending out the yin yang since Ď08, and inflation has been pretty muted for the most part. I wouldnít worry about it. If it finally starts we have a LOT of raises we could do to interest rates to temper down the inflation and still not get rates out of line with historical norms.

Iím not worried about inflation at all. Iíd be more worried about deflation with the developed world not having enough babies to grow like the past.

The problem is that with the amount of indebtedness in all developed economies today they would not be able to service the debt if/when inflation does rear its head and central banks were forced to raise rates to anywhere near historic norms. That is an option that is simply not on the table.

Inflation also reduces the real value of the debt, and that impact happens more rapidly than the monetary policy you're describing.

Only if you're not funding your borrowing with... extra borrowing...

talltexan

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Re: Do you expect inflation?
« Reply #26 on: June 02, 2020, 03:20:03 PM »
if this were true, then why weren't Federal budget deficits larger during the 1970's?

celerystalks

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Re: Do you expect inflation?
« Reply #27 on: June 02, 2020, 06:44:42 PM »
if this were true, then why weren't Federal budget deficits larger during the 1970's?

Taxes were really high.

Inflation isnít caused by the borrowing. It is caused by government spending.  Borrowing is just one alternative for the source of funds spent.

vand

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Re: Do you expect inflation?
« Reply #28 on: June 03, 2020, 03:47:53 AM »
if this were true, then why weren't Federal budget deficits larger during the 1970's?

Morgan Housel wrote a brilliant post on how the US managed to shrink in the decades after WWII through a combination of real growth and inflation https://www.collaborativefund.com/blog/who-pays-for-this/

However this only worked because both GDP growth (both real and nominal) ws much higher than growth in nominal debt during the post-war era.

By the time the SHTF in the 70s US debt as a %age of GDP had reached its bottom and the government ran pretty much balanced budgets up until the end of the decade.

Today the debt is increasing not just nominally but in real terms too.  New debt is being issued to pay for interest on the current debt, rather than being paid for by real growth. Until the government demonstrates that it can run a balanced budget there is no reason to believe that debt can be inflated away.

vand

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Re: Do you expect inflation?
« Reply #29 on: June 11, 2020, 03:30:18 AM »
I'm not convinced by the deflationist argument either.. Everyone always points to Japan.. but that is the only real example of a real sustained deflationary environment in the global fiat currency era since 1971. I don't really consider those -1% dips in inflation after the economy has imploded in countries like Ireland & Iceland to be real deflation, merely a collapsed boom where prices have corrected back to more realistic levels.

The weight of historical evidence shows that far, far more economies have suffered from destructive inflationary periods than from deflationary periods.  Maybe I'm cynical, but I think the people with their fingers on the printing presses like to tout the deflationary threat so that it gives them excuse to not even bother with any fiscal restraint.

@vand Iíve been thinking about your post. And coincidentally. I just listened to the latest MoneyWeek podcast that interviewed James Ferguson. He had some very interesting things to say about inflation. Basically, he expects it. Worth a listen if you havenít already done so.

@Buffaloski Boris
One of the interesting takeaways from that interview was his explanation and understanding of the spread between growth and value, and how the ZIRP environment favours growth stocks. This is something new that I'm only come to appreciate in the last year.

Other pieces which helped me understand it were

https://awealthofcommonsense.com/2020/04/why-value-died/
https://www.youtube.com/watch?v=mVe1oGzKpJw

While I maintain that stocks are not an inflation hedge, if you are going to hold stocks in the face of an inflationary shock then it makes sense to be heavily positioned towards value. What say you?

DalioGold10

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Re: Do you expect inflation?
« Reply #30 on: June 11, 2020, 05:26:26 AM »

How to respond to it in my view is pretty much the same way you respond to any economic unknown: diversification.  Own a little bit of everything across asset classes and countries.  Diversify like mad. Diversify in the morning.  Diversify in your sleep. Buy, hold, and hopefully sell higher a decade or more later.

Exactly !
Diversify across assets classes. We may have the tendency to favor a certain scenario hence tilt our asset allocation, however, history has proved us that is very difficult to consistently be right.

That is what makes my sleep well at night.

BicycleB

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Re: Do you expect inflation?
« Reply #31 on: June 11, 2020, 02:56:30 PM »
Nobody expects the Spanish inflation.

I expect the Martian inflation. Markets to the moon!

Buffaloski Boris

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Re: Do you expect inflation?
« Reply #32 on: June 11, 2020, 04:25:22 PM »
I'm not convinced by the deflationist argument either.. Everyone always points to Japan.. but that is the only real example of a real sustained deflationary environment in the global fiat currency era since 1971. I don't really consider those -1% dips in inflation after the economy has imploded in countries like Ireland & Iceland to be real deflation, merely a collapsed boom where prices have corrected back to more realistic levels.

The weight of historical evidence shows that far, far more economies have suffered from destructive inflationary periods than from deflationary periods.  Maybe I'm cynical, but I think the people with their fingers on the printing presses like to tout the deflationary threat so that it gives them excuse to not even bother with any fiscal restraint.

@vand Iíve been thinking about your post. And coincidentally. I just listened to the latest MoneyWeek podcast that interviewed James Ferguson. He had some very interesting things to say about inflation. Basically, he expects it. Worth a listen if you havenít already done so.

@Buffaloski Boris
One of the interesting takeaways from that interview was his explanation and understanding of the spread between growth and value, and how the ZIRP environment favours growth stocks. This is something new that I'm only come to appreciate in the last year.

Other pieces which helped me understand it were

https://awealthofcommonsense.com/2020/04/why-value-died/
https://www.youtube.com/watch?v=mVe1oGzKpJw

While I maintain that stocks are not an inflation hedge, if you are going to hold stocks in the face of an inflationary shock then it makes sense to be heavily positioned towards value. What say you?

A question I'd have, which I've never seen analyzed, is what is the debt profile of growth versus value firms?  Because remember it's not just an earnings question, it's a cost one as well.  I'm tending to agree though that value has the advantage. If you take the earnings profile of say a typical tech company has low or zero revenue early, and then (hopefully) explosive revenues much later on.  If your discount rate is say 2%, those later (explosive) earnings/ cash flow later look a lot better than they would if you were using an 8% discount rate!

One part of the article that you referenced that I latched onto said this: "Because of the differences in the sector make-up of the underlying markets, U.S. stocks are more heavily weighted towards growth stocks while European and Japanese stocks are more in the value camp."  Well isn't that interesting?  Tack it onto my myriad reasons for wanting to invest outside the US.  Although in honesty, currency risk is the big thing for me.  As in being an American and having most of my assets in the $US puts me at risk.

As for whether equities are an inflation hedge, Iím pretty much agnostic. Ideally your portfolio should be designed over time to weather inflation or deflation. Easily said, not so easily done. And we donít really know that inflation is in the cards in the foreseeable future.  I personally think it will be, (stagflation? after some short term deflation?) but I have low confidence in that prediction.

« Last Edit: June 12, 2020, 03:39:59 AM by Buffaloski Boris »

dragoncar

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Re: Do you expect inflation?
« Reply #33 on: June 12, 2020, 12:31:54 AM »
Nobody expects the Spanish inflation.

I expect the Martian inflation. Markets to the moon!

Wouldn't that be the Lunar inflation?

talltexan

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Re: Do you expect inflation?
« Reply #34 on: June 12, 2020, 08:56:11 AM »
I'm not convinced by the deflationist argument either.. Everyone always points to Japan.. but that is the only real example of a real sustained deflationary environment in the global fiat currency era since 1971. I don't really consider those -1% dips in inflation after the economy has imploded in countries like Ireland & Iceland to be real deflation, merely a collapsed boom where prices have corrected back to more realistic levels.

The weight of historical evidence shows that far, far more economies have suffered from destructive inflationary periods than from deflationary periods.  Maybe I'm cynical, but I think the people with their fingers on the printing presses like to tout the deflationary threat so that it gives them excuse to not even bother with any fiscal restraint.

@vand Iíve been thinking about your post. And coincidentally. I just listened to the latest MoneyWeek podcast that interviewed James Ferguson. He had some very interesting things to say about inflation. Basically, he expects it. Worth a listen if you havenít already done so.

@Buffaloski Boris
One of the interesting takeaways from that interview was his explanation and understanding of the spread between growth and value, and how the ZIRP environment favours growth stocks. This is something new that I'm only come to appreciate in the last year.

Other pieces which helped me understand it were

https://awealthofcommonsense.com/2020/04/why-value-died/
https://www.youtube.com/watch?v=mVe1oGzKpJw

While I maintain that stocks are not an inflation hedge, if you are going to hold stocks in the face of an inflationary shock then it makes sense to be heavily positioned towards value. What say you?

A question I'd have, which I've never seen analyzed, is what is the debt profile of growth versus value firms?  Because remember it's not just an earnings question, it's a cost one as well.  I'm tending to agree though that value has the advantage. If you take the earnings profile of say a typical tech company has low or zero revenue early, and then (hopefully) explosive revenues much later on.  If your discount rate is say 2%, those later (explosive) earnings/ cash flow later look a lot better than they would if you were using an 8% discount rate!

One part of the article that you referenced that I latched onto said this: "Because of the differences in the sector make-up of the underlying markets, U.S. stocks are more heavily weighted towards growth stocks while European and Japanese stocks are more in the value camp."  Well isn't that interesting?  Tack it onto my myriad reasons for wanting to invest outside the US.  Although in honesty, currency risk is the big thing for me.  As in being an American and having most of my assets in the $US puts me at risk.

As for whether equities are an inflation hedge, Iím pretty much agnostic. Ideally your portfolio should be designed over time to weather inflation or deflation. Easily said, not so easily done. And we donít really know that inflation is in the cards in the foreseeable future.  I personally think it will be, (stagflation? after some short term deflation?) but I have low confidence in that prediction.

Deflation is either rare or unavoidable. Inflation is either certain, or the result of government over-reach that is promised but never arrives.

Buffaloski Boris

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Re: Do you expect inflation?
« Reply #35 on: June 12, 2020, 10:38:00 AM »


Deflation is either rare or unavoidable. Inflation is either certain, or the result of government over-reach that is promised but never arrives.

Ainít that the truth. I think you missed your calling: you should be working Public Relations for the Fed. :-p

maizefolk

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Re: Do you expect inflation?
« Reply #36 on: June 12, 2020, 05:15:31 PM »
Nobody expects the Spanish inflation.

I expect the Martian inflation. Markets to the moon!

Wouldn't that be the Lunar inflation?

Prices go to mars. Stocks only go to the moon. Bonds drop to venus.

MustacheAndaHalf

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Re: Do you expect inflation?
« Reply #37 on: June 14, 2020, 07:47:58 AM »
Experts and even the Fed usually get inflation predictions wrong.  The best approximation turns out to be the current inflation rate, which was 0.1% in May.  So I wouldn't expect inflation.

Indexer

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Re: Do you expect inflation?
« Reply #38 on: June 14, 2020, 02:00:45 PM »
I doubt we will have significant inflation for awhile, for the exact same reason we didn't have inflation 08-2012.

If the government was spending this amount of money in a healthy economy we would likely see inflation. However, the recession caused by business closures due to Covid should cause deflation. Businesses don't want to sit on inventory, so they will likely lower prices, and any businesses going out of business will have clearance sales.

If you add a lot of stimulus to an economy already experiencing deflation the inflation created by the stimulus should offset the deflation caused by the recession. The end result should be very low inflation. That is what we saw after 08.

The Fed has been struggling to get inflation to it's 2% target for a decade. I don't see that changing because of extra large unemployment checks in the middle of a recession.

Painters Brush

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Re: Do you expect inflation?
« Reply #39 on: June 15, 2020, 09:58:29 AM »
...up until now all the new currency created has successfully been directed into inflating asset prices rather than consumer prices.

Fascinating observation.

I never imagined such a disconnect between investment inflation and consumer inflation.

It brings home the arbitrary values of paper currency and paper investments.

maizefolk

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Re: Do you expect inflation?
« Reply #40 on: June 15, 2020, 04:37:46 PM »
If you add a lot of stimulus to an economy already experiencing deflation the inflation created by the stimulus should offset the deflation caused by the recession. The end result should be very low inflation. That is what we saw after 08.

Agreed that both forces are a play. But having them essentially cancel out and produce extremely low inflation would require that the inflationary effect of the monetary and fiscal stimulus be about equal in size the the deflationary effect of the recession wouldn't it? I don't know that there is any reason to think they would automatically be about equal and cancel out. Although I supposed that if it becomes clear the deflationary effect is starting to predominate presumably the fed would try to adapt an even more inflationary policy to try to counterbalance it.

Could well be something I am missing though.

Dicey

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Re: Do you expect inflation?
« Reply #41 on: June 15, 2020, 04:45:49 PM »
As a child of the seventies, I always expect and plan for inflation. Our weapons: a Defined Benefit Pension that includes COLAs, mortgaged rental properties, and an equity heavy portfolio. And mad mustachian skillz.
« Last Edit: June 15, 2020, 04:47:35 PM by Dicey »

talltexan

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Re: Do you expect inflation?
« Reply #42 on: June 16, 2020, 10:09:14 AM »


Deflation is either rare or unavoidable. Inflation is either certain, or the result of government over-reach that is promised but never arrives.

Ainít that the truth. I think you missed your calling: you should be working Public Relations for the Fed. :-p

I will be sure to list you as a reference, unless you're actually Russian, in which case, I'll be applying for other jobs within gov't with that reference!

Mighty-Dollar

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Re: Do you expect inflation?
« Reply #43 on: June 17, 2020, 12:50:45 PM »
I'm concerned that all this giving out free money and running up national and state government debts will lead to inflation.
Well the inflation that everyone was worried about after all of the money printing after 2008 never happened.

PDXTabs

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Re: Do you expect inflation?
« Reply #44 on: June 17, 2020, 01:37:42 PM »
I'm concerned that all this giving out free money and running up national and state government debts will lead to inflation.
Well the inflation that everyone was worried about after all of the money printing after 2008 never happened.

Yea, money printing can cause inflation, but you need to actually spend that money on real tangible assets that become harder to acquire. If you just print money and leave it in a bank vault it may prop up a sick banking system but it won't lead to inflation.

vand

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Re: Do you expect inflation?
« Reply #45 on: June 18, 2020, 02:29:59 AM »
As a child of the seventies, I always expect and plan for inflation. Our weapons: a Defined Benefit Pension that includes COLAs, mortgaged rental properties, and an equity heavy portfolio. And mad mustachian skillz.

It's worth pointing out that while the 1970s are regarded as a painful economic period, the average inflation rate in the US averaged a mere 6.8% by official statistics. This is, nothing. This is the standard rate in many developing and emerging markets. If the inflation genie really escapes then there is the potential for much higher inflation than the so-far worst documented period in our developed markets.

One of the worst mistake that you can make as an investor is to think that future events can never exceed historical precedence. I would suggest in the case of inflation, if the policy makers get it wrong, the risk is there that we can exceed it by very great amount.


Dicey

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Re: Do you expect inflation?
« Reply #46 on: June 18, 2020, 07:34:13 AM »
As a child of the seventies, I always expect and plan for inflation. Our weapons: a Defined Benefit Pension that includes COLAs, mortgaged rental properties, and an equity heavy portfolio. And mad mustachian skillz.

It's worth pointing out that while the 1970s are regarded as a painful economic period, the average inflation rate in the US averaged a mere 6.8% by official statistics. This is, nothing. This is the standard rate in many developing and emerging markets. If the inflation genie really escapes then there is the potential for much higher inflation than the so-far worst documented period in our developed markets.

One of the worst mistake that you can make as an investor is to think that future events can never exceed historical precedence. I would suggest in the case of inflation, if the policy makers get it wrong, the risk is there that we can exceed it by very great amount.
Averages smooth spikes, making inflation seem less dramatic than it actually was. Your point that 6.8% isn't as much as it could be is valid, but most people on this site have never experienced even that level in their lifetimes. That's yet another reason that compound interest is so powerful, along with long, low fixed rate mortgages. We might be singing different verses, @vand, but it's the same song.

maizefolk

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Re: Do you expect inflation?
« Reply #47 on: June 18, 2020, 08:05:12 AM »
In late 1981 mortgage interest rates were >18% annually. Inflation rates were well above 10% at several points in the 1970s and early 1980s.

Of course the future can always be worse than the past. But the not so distant US past was already pretty extreme relative to what I've experienced my entire adult life. And basically the same preparations work for inflation, whether we're talking an increase to 10%/year, or 10%/month.

As a child of the seventies, I always expect and plan for inflation. Our weapons: a Defined Benefit Pension that includes COLAs, mortgaged rental properties, and an equity heavy portfolio. And mad mustachian skillz.

In hyperinflation, COLAs likely fall behind rises in living expenses. But an equity heavy portfolio is going to do a much better job of preserve wealth through inflation, or even hyperinflation, than one heavy on bonds/cash. And rental properties mortgaged at long term fixed interest rates will actually produce more net income in real terms if inflation kicks up than if it does not.

Not saying it'd be fun, but Dicey's formula sounds like the best recipe available.

I'm not sure anything can effectively prepare/hedge against Weimar Republic/Venezuela inflation. At that point the negative effects of inflation move from the fiscal to the political. I don't know that there is a way to invest to be protected from wide-scale unrest and lawlessness, the rise of totalitarian regimes, asset confiscation/nationalization, etc.

waltworks

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Re: Do you expect inflation?
« Reply #48 on: June 18, 2020, 08:29:59 AM »
Glod!!!

-W

GuitarStv

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Re: Do you expect inflation?
« Reply #49 on: June 18, 2020, 09:23:13 AM »
Nobody expects the Spanish inflation.

I expect the Martian inflation. Markets to the moon!

Wouldn't that be the Lunar inflation?

Prices go to mars. Stocks only go to the moon. Bonds drop to venus.

Depends which moon you're expecting markets to go to.  There are further moons than Luna.