Assets during a time of high inflation

[Paper Chaser]

With central banks flooding economies with trillions in stimulus, (and those numbers likely to climb significantly) it seems destined that there will be a time of high inflation on the other side of this outbreak in order to make the debt less onerous.

I know many people have expressed concern about markets, and have gone to more conservative asset allocations recently but I think that could backfire in an environment with high inflation. So, how comfortable are you all with your asset allocation during a time of high inflation? Stocks seem like the easy button (as usual), but with low mortgage rates and a stalled housing market perhaps there will be buying opportunities in RE soon?

[rantk81]

Uh, maybe inflation will come later. Way later.
Right now, we're going to experience a wave of deflation, far worse than during the global financial crisis.

[elysianfields]

Indeed, what we’re seeing now is a huge drop-off in aggregate demand, which isn’t at all inflationary.

[GuitarStv]

Good thing our governments have been responsible and raised rates after the 2008 financial crisis while the market was on a tear.  I mean, if they kept rates ridiculously low during super boom times we would all be fucked . . . because there wouldn't be any action they could take to counter deflation.

[dandarc]

Inflation didn't really hit the last time we did something like this 10 years ago. We'll be lucky if this staves off deflation in the short term.

I think it is "velocity of money" - how often money changes hands that correlates best with inflation, not supply. And everyone in the country being told to stay home except for grocery shopping certainly curtails that in a big way.

[SuperNintendo Chalmers]

I'm certainly no economist, and barely an armchair type money person.  So I'm no expert, and agree that inflation probably won't rise in the short term.

But it does seem to me that there is a good chance that in order to keep the country from devolving into a post-apocalyptic warzone in which people crouch behind their piles of hoarded toilet paper with a shotgun pointed to the front door, the government will be pumping massive amounts of cash into the economy over the next few months.  With so many people already living paycheck to paycheck, etc., it may really take unprecedented levels of stimulus to keep large segments of the population afloat. 

Let's say in 6-8 months it's announced there is a new vaccine, the curve has flattened, there is herd immunity, social distancing is no longer mandatory, and all the other good buzzwords.  And then the economy gets jump started big time as people and companies start spending, and also pumping money back into the market (don't many large companies still have a ton of cash on their balance sheets?).  I can see a high inflationary environment in that scenario. 

I guess I've always kind of wondered why inflation hasn't risen before this crisis, given low interest rates, booming economy, access to credit, etc.  So maybe I'm just expecting this to happen at some point, and the impending massive stimulus makes it seem like it's going to be a doozy.  But who knows.  And probably a problem for future world. 

[Telecaster]

Classic Keysenian theory says that in times of economic contraction you can print all the money you want without inflation.  In 2008 the printing presses almost melted down and inflation was almost nil.  Although some say the inflation was expressed in the stock and housing markets. 

[roomtempmayo]

I guess I've always kind of wondered why inflation hasn't risen before this crisis, given low interest rates, booming economy, access to credit, etc.  So maybe I'm just expecting this to happen at some point, and the impending massive stimulus makes it seem like it's going to be a doozy.  But who knows.  And probably a problem for future world.

Lots of really smart people have been wondering this for years.

The four most prominent answers - which are not exclusive of one another - are inequality, slow technological growth, a population that is both aging and not growing much, and global trade.

Inequality cuts against inflation because the savers have the money, not the spenders.  Saving slows the speed of money, effectively lowering the supply.

Technology hasn't enabled the average worker to become more productive at the same rate as the mid-20th century.  The interweb increases productivity massively for a small slice of society.  A truck, or a tractor, or a conveyor belt impacted a greater percentage of the population with greater increases in productivity than anything created in the last couple decades.  That slowing increase in productivity leads to slower wage growth, which leads to falling demand.

A population that is aging and stable or shrinking is less productive than a young and growing workforce.  That lower productivity leads to lower per capita wages, and lower demand.

Last, the globalization of supply chains have been a massively deflationary force because they decrease the costs of goods to consumers.  Big box retail stores are deflationary ground zero.

Those are the four that I think most mainstream folks point to as reasons we don't see inflation. 

There's also the whole Modern Monetary Theory school now out there arguing that the dollar can never really inflate regardless of supply since it serves as the world's reserve currency.  I don't know that I've ever fully understood their logic.

[SuperNintendo Chalmers]

I guess I've always kind of wondered why inflation hasn't risen before this crisis, given low interest rates, booming economy, access to credit, etc.  So maybe I'm just expecting this to happen at some point, and the impending massive stimulus makes it seem like it's going to be a doozy.  But who knows.  And probably a problem for future world.

Lots of really smart people have been wondering this for years.

The four most prominent answers - which are not exclusive of one another - are inequality, slow technological growth, a population that is both aging and not growing much, and global trade.

Inequality cuts against inflation because the savers have the money, not the spenders.  Saving slows the speed of money, effectively lowering the supply.

Technology hasn't enabled the average worker to become more productive at the same rate as the mid-20th century.  The interweb increases productivity massively for a small slice of society.  A truck, or a tractor, or a conveyor belt impacted a greater percentage of the population with greater increases in productivity than anything created in the last couple decades.  That slowing increase in productivity leads to slower wage growth, which leads to falling demand.

A population that is aging and stable or shrinking is less productive than a young and growing workforce.  That lower productivity leads to lower per capita wages, and lower demand.

Last, the globalization of supply chains have been a massively deflationary force because they decrease the costs of goods to consumers.  Big box retail stores are deflationary ground zero.

Those are the four that I think most mainstream folks point to as reasons we don't see inflation. 

There's also the whole Modern Monetary Theory school now out there arguing that the dollar can never really inflate regardless of supply since it serves as the world's reserve currency.  I don't know that I've ever fully understood their logic.

Interesting -- thanks. 

[BicycleB]

I guess I've always kind of wondered why inflation hasn't risen before this crisis, given low interest rates, booming economy, access to credit, etc.  So maybe I'm just expecting this to happen at some point, and the impending massive stimulus makes it seem like it's going to be a doozy.  But who knows.  And probably a problem for future world.

Lots of really smart people have been wondering this for years.

The four most prominent answers - which are not exclusive of one another - are inequality, slow technological growth, a population that is both aging and not growing much, and global trade.

Inequality cuts against inflation because the savers have the money, not the spenders.  Saving slows the speed of money, effectively lowering the supply.

Technology hasn't enabled the average worker to become more productive at the same rate as the mid-20th century.  The interweb increases productivity massively for a small slice of society.  A truck, or a tractor, or a conveyor belt impacted a greater percentage of the population with greater increases in productivity than anything created in the last couple decades.  That slowing increase in productivity leads to slower wage growth, which leads to falling demand.

A population that is aging and stable or shrinking is less productive than a young and growing workforce.  That lower productivity leads to lower per capita wages, and lower demand.

Last, the globalization of supply chains have been a massively deflationary force because they decrease the costs of goods to consumers.  Big box retail stores are deflationary ground zero.

Those are the four that I think most mainstream folks point to as reasons we don't see inflation. 

There's also the whole Modern Monetary Theory school now out there arguing that the dollar can never really inflate regardless of supply since it serves as the world's reserve currency.  I don't know that I've ever fully understood their logic.

Great post, @caleb!

OP, I don't know if some inflation burst is around the corner or not. I grew up during America's last burst of inflation (the 1970s-80s) and include a bit of inflation contingency preparation in my financial mix, so personally I am insulated enough to to feel safe if it happens. Fwiw my big "plan" is to roughly balance fixed payments and fixed income sources, while assuming that stocks and jobs roughly inflate in proportion to long term costs. Obviously having some safety layer (whether of skill or resources) and diversification help too.

In my opinion, balancing your financial assets should take only a small fraction of your attention.  Take care of it and move on. Earnings, health and skill are valuable in any inflation/deflation regime.  Where those are within your control, focus there.

[roomtempmayo]

OP, I don't know if some inflation burst is around the corner or not. I grew up during America's last burst of inflation (the 1970s-80s) and include a bit of inflation contingency preparation in my financial mix, so personally I am insulated enough to to feel safe if it happens. Fwiw my big "plan" is to roughly balance fixed payments and fixed income sources, while assuming that stocks and jobs roughly inflate in proportion to long term costs. Obviously having some safety layer (whether of skill or resources) and diversification help too.

My dad and grandfather both invested through some periods of high inflation, and one of the main lessons I took from them is that you always need to be in stocks to stay ahead of inflation.  If you get too conservative, inflation will eat you alive.

I think that was common sense circa 1985, although since then the argument for equities seems to be their inherent upside rather than the downside of inflation outpacing bonds.