Equities and inflation

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Topic Author
TwoIdenticalIndexes
Posts: 97
Joined: Tue Jan 14, 2020 5:34 pm

Equities and inflation

Post by TwoIdenticalIndexes »

Shouldn't equities be shielded from inflation? Expected future cashflows should rise with inflation, shouldn't they? Is the problem really the devaluation of the dollar which might occur due to inflation? Would foreign firms with cashflows denominated in other currencies benefit from inflation in the USA?
Northern Flicker
Posts: 6499
Joined: Fri Apr 10, 2015 12:29 am

Re: Equities and inflation

Post by Northern Flicker »

TwoIdenticalIndexes wrote: Tue Aug 11, 2020 7:17 pm Shouldn't equities be shielded from inflation? Expected future cashflows should rise with inflation, shouldn't they?
Yes, but it is complex. Their gross revenue will rise, but so will their expenses-- payroll, expenses, materials or equipment used to make their products, etc. There are no guarantees that costs and revenues will rise at the same rate. Cost of capital will rise, but existing debt will be reduced in real terms.
Risk is not a guarantor of return.
000
Posts: 2739
Joined: Thu Jul 23, 2020 12:04 am

Re: Equities and inflation

Post by 000 »

They didn't do so well during the US 1970s stagflation. Or the Weimar Republic hyperinflation. Or the 1930s worldwide Great Depression.

Edit: please see below for more discussion on the last two claims.
Last edited by 000 on Tue Aug 11, 2020 11:12 pm, edited 1 time in total.
Iorek
Posts: 1167
Joined: Fri Mar 08, 2013 9:38 am

Re: Equities and inflation

Post by Iorek »

If you talk to Vanguard PAS their approach seems to be that the best long term hedge against inflation is equities fwiw
TimeTheMarket
Posts: 166
Joined: Fri Jan 25, 2019 8:49 am

Re: Equities and inflation

Post by TimeTheMarket »

000 wrote: Tue Aug 11, 2020 7:46 pm They didn't do so well during the US 1970s stagflation. Or the Weimar Republic hyperinflation. Or the 1930s worldwide Great Depression.
early 30's was deflationary so definitely stocks would have been expected to do poorly.

As for weimar they did pretty well: https://www.businessinsider.com/heres-w ... on-2011-11

70's were cruel to stocks, though.
Username is not serious :)
000
Posts: 2739
Joined: Thu Jul 23, 2020 12:04 am

Re: Equities and inflation

Post by 000 »

TimeTheMarket wrote: Tue Aug 11, 2020 8:14 pm early 30's was deflationary so definitely stocks would have been expected to do poorly.
Some places in the world experienced goods inflation. And the US and UK experienced asset/currency inflation by leaving the Gold standard, although that is a contested point.
TimeTheMarket wrote: Tue Aug 11, 2020 8:14 pm As for weimar they did pretty well: https://www.businessinsider.com/heres-w ... on-2011-11
Not in the long term :twisted:
Robot Monster
Posts: 1528
Joined: Sun May 05, 2019 11:23 am
Location: New York

Re: Equities and inflation

Post by Robot Monster »

If inflation comes screaming out at us like an ancient berzerker with a battle axe, the Fed might have no choice but to unleash the kraken and raise rates. Cash and bonds would wake from the dead because they'd actually yield something. In that event, there would be no TINA. Only Zuul.
"Happiness comes from being connected in the right ways to: other people, your work, something larger than yourself."
rockstar
Posts: 737
Joined: Mon Feb 03, 2020 6:51 pm

Re: Equities and inflation

Post by rockstar »

TwoIdenticalIndexes wrote: Tue Aug 11, 2020 7:17 pm Shouldn't equities be shielded from inflation? Expected future cashflows should rise with inflation, shouldn't they? Is the problem really the devaluation of the dollar which might occur due to inflation? Would foreign firms with cashflows denominated in other currencies benefit from inflation in the USA?
Why are you worried about inflation when we're essentially in a recession, where the economy is being held together by Fed and fiscal stimulus?
alex_686
Posts: 6841
Joined: Mon Feb 09, 2015 2:39 pm

Re: Equities and inflation

Post by alex_686 »

000 wrote: Tue Aug 11, 2020 7:46 pm They didn't do so well during the US 1970s stagflation. Or the Weimar Republic hyperinflation. Or the 1930s worldwide Great Depression.
The other 2 items are off as well. Never confuse correlation and causation. While their might be a correlation, it does not mean there is a causation.

The Great Depression is off topic - it had deflation, not inflation.

The 1970s stagflation is the easiest one. There was a oil embargo.

Decreased supply means higher prices. IIRC, 30% of the GNP inputs were energy based. So this drove up prices.

Of course, if 30% of your GNP inputs are energy based, and you cut those inputs by 25% you are going to get a wrecked economy.

To the OP: Equities do fine during inflation. During high inflation they may not be able to rapidly or fully pass on costs. So not a prefect hedge. But a decent one.

Now, the next question you have to ask is why we are having inflation. That is a harder one but it is the one that counts.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
000
Posts: 2739
Joined: Thu Jul 23, 2020 12:04 am

Re: Equities and inflation

Post by 000 »

alex_686 wrote: Tue Aug 11, 2020 9:01 pm The Great Depression is off topic - it had deflation, not inflation.
The Great Depression was a global event. As I stated upthread, some countries experienced inflation. Additionally, the US and UK experienced currency inflation -- the currency was worth less than before. I must concede this was countered by deflationary pressure, so the example was perhaps a bad one from US perspective.
alex_686 wrote: Tue Aug 11, 2020 9:01 pm The 1970s stagflation is the easiest one. There was a oil embargo.
So?
alex_686 wrote: Tue Aug 11, 2020 9:01 pm To the OP: Equities do fine during inflation. During high inflation they may not be able to rapidly or fully pass on costs. So not a prefect hedge. But a decent one.
IMO, no one can know this will continue to hold true.
alex_686
Posts: 6841
Joined: Mon Feb 09, 2015 2:39 pm

Re: Equities and inflation

Post by alex_686 »

000 wrote: Tue Aug 11, 2020 9:08 pm
alex_686 wrote: Tue Aug 11, 2020 9:01 pm The Great Depression is off topic - it had deflation, not inflation.
The Great Depression was a global event. As I stated upthread, some countries experienced inflation. Additionally, the US and UK experienced currency inflation -- the currency was worth less than before. I must concede this was countered by deflationary pressure, so the example was perhaps a bad one from US perspective.
alex_686 wrote: Tue Aug 11, 2020 9:01 pm The 1970s stagflation is the easiest one. There was a oil embargo.
So?
alex_686 wrote: Tue Aug 11, 2020 9:01 pm To the OP: Equities do fine during inflation. During high inflation they may not be able to rapidly or fully pass on costs. So not a prefect hedge. But a decent one.
IMO, no one can know this will continue to hold true.
1. Not sure what you are trying to say about the great depression. I am pretty sure that the UK suffered deflation like the US. As for currency inflation - that is a little off. Currency was tied to gold so that was fixed. The economy was crushed so less need for money. The kink you might be missing is that there is a difference between high power currency (gold in this case, M1 in modern parlance) and money (all negotiable notes, real bills back then, M3 today)

2. The OP was asking about the the relationship between equites and inflation. So I would think one would use a period in history where inflation affected equity values or equity values affected inflation. You chose one where neither happened.

3. Well, yes, who knows what will happen. That being said, the theory that suggests that equities will do well during inflation is a old and simple
theory which has held up well for 100+ years across multiple markets.

For context, I am working off 3 sources.

Popular: Money: The Unauthorized Biography--From Coinage to Cryptocurrencies by Felix Martin

Excellent Survey - and its free: Financial Market History: Reflections on the Past for Investors Today by David Chambers https://smile.amazon.com/Financial-Mark ... 750&sr=8-3

Something a bit thicker: A Monetary History of the United States, 1867-1960 by Milton Friedman and Anna Jacobson Schwartz
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Northern Flicker
Posts: 6499
Joined: Fri Apr 10, 2015 12:29 am

Re: Equities and inflation

Post by Northern Flicker »

The great depression was deflationary, not inflationary for the US. Per this inflation calculator, an item costing $100 in 1929 costed $81.87 in 1940.
Risk is not a guarantor of return.
Northern Flicker
Posts: 6499
Joined: Fri Apr 10, 2015 12:29 am

Re: Equities and inflation

Post by Northern Flicker »

From 1967 to 1981, the real return of the S&P 500 was zero. It kept pace with inflation, no more no less. As is typical with equity markets, there was substantial volatility along the way, including a major bear market in 1973/1974.
Risk is not a guarantor of return.
000
Posts: 2739
Joined: Thu Jul 23, 2020 12:04 am

Re: Equities and inflation

Post by 000 »

Here are some other examples of inflationary periods:
France 1790s: Does anyone know how stocks performed? (yes there was a stock market then)
Russia 1923: stocks wiped out
Germany 1923: stocks did ok or well
Greece 1944: Does anyone know how stocks performed?
Hungary 1946: stocks wiped out
China 1945 - 1949: stocks wiped out
US 1970s: stocks did ok or well
Argentina 1970s - 1980s: Does anyone know how stocks performed?
Zimbabwe 2006 - 2008: Does anyone know how stocks performed?
Venezuela recently: Does anyone know how stocks performed?
MathWizard
Posts: 4337
Joined: Tue Jul 26, 2011 1:35 pm

Re: Equities and inflation

Post by MathWizard »

Northern Flicker wrote: Tue Aug 11, 2020 10:48 pm From 1967 to 1981, the real return of the S&P 500 was zero. It kept pace with inflation, no more no less. As is typical with equity markets, there was substantial volatility along the way, including a major bear market in 1973/1974.
Did corporate bonds do much better over that time (inflation adjusted return)?

I was young then, but it seemed like the 70's were pretty awful all around
financial-wise. Interest rates were rising, 1973 was the oil embargo, and my wife can
attest that the farm crisis in the midwest was starting in the mid 70's, her father
nearly losing his farm.
Northern Flicker
Posts: 6499
Joined: Fri Apr 10, 2015 12:29 am

Re: Equities and inflation

Post by Northern Flicker »

000 wrote: Here are some other examples of inflationary periods:
...
Russia 1923: stocks wiped out
The Russian stock market was wiped out in 1917. In 1923 there was nothing left for inflation to wipe out.
Risk is not a guarantor of return.
Northern Flicker
Posts: 6499
Joined: Fri Apr 10, 2015 12:29 am

Re: Equities and inflation

Post by Northern Flicker »

MathWizard wrote: Tue Aug 11, 2020 11:28 pm
Northern Flicker wrote: Tue Aug 11, 2020 10:48 pm From 1967 to 1981, the real return of the S&P 500 was zero. It kept pace with inflation, no more no less. As is typical with equity markets, there was substantial volatility along the way, including a major bear market in 1973/1974.
Did corporate bonds do much better over that time (inflation adjusted return)?

I was young then, but it seemed like the 70's were pretty awful all around
financial-wise. Interest rates were rising, 1973 was the oil embargo, and my wife can
attest that the farm crisis in the midwest was starting in the mid 70's, her father
nearly losing his farm.
Term exposure did very poorly. Credit exposure did not help much in that regard. TIPS and i-Bonds did not exist. Long-term bonds got crushed by inflation. Residential mortgages were assumable then (transfered from home seller to home buyer), so mortgages got hammered because they just extended to maturity. Most were 20-year terms then. This caused the Savings and Loan insolvency crisis-- deposit account interest rates rose to be higher than the interest rates on the loans in portfolios. Real estate, gold, and cash had positive real returns. Dropping the gold standard in the 1970's makes it hard to generalize the behavior of gold.
Risk is not a guarantor of return.
rgs92
Posts: 2770
Joined: Mon Mar 02, 2009 8:00 pm

Re: Equities and inflation

Post by rgs92 »

I always trust (well, my leap of faith here) that since inflation means higher prices, and companies are the ones raising prices, thus generating higher revenue, and the higher revenue will produce higher profits which will flow to you, the stock owner.

Pricing power is everything when you need to beat inflation.
ScubaHogg
Posts: 715
Joined: Sun Nov 06, 2011 3:02 pm

Re: Equities and inflation

Post by ScubaHogg »

000 wrote: Tue Aug 11, 2020 11:07 pm Russia 1923: stocks wiped out
Hungary 1946: stocks wiped out
China 1945 - 1949: stocks wiped out
I don’t think you can chalk these up to inflation. Russia and Chinese holders of equity were undoubtedly “wiped out” out by new regimes that were ideologically opposed to private property and confiscated everything. I assume the same happened in Hungry as a victorious USSR imposed a friendly communist government.
“Unexpected Returns dominate the Expected Returns” - Ken French
ScubaHogg
Posts: 715
Joined: Sun Nov 06, 2011 3:02 pm

Re: Equities and inflation

Post by ScubaHogg »

rgs92 wrote: Wed Aug 12, 2020 12:31 am I always trust (well, my leap of faith here) that since inflation means higher prices, and companies are the ones raising prices, thus generating higher revenue, and the higher revenue will produce higher profits which will flow to you, the stock owner.

Pricing power is everything when you need to beat inflation.
Agreed.

It follows that since prices are higher, someone is collecting those higher prices. To a rough approximation, if it’s not companies in aggregate who is it?
“Unexpected Returns dominate the Expected Returns” - Ken French
Valuethinker
Posts: 41147
Joined: Fri May 11, 2007 11:07 am

Re: Equities and inflation

Post by Valuethinker »

alex_686 wrote: Tue Aug 11, 2020 9:01 pm
000 wrote: Tue Aug 11, 2020 7:46 pm They didn't do so well during the US 1970s stagflation. Or the Weimar Republic hyperinflation. Or the 1930s worldwide Great Depression.
The other 2 items are off as well. Never confuse correlation and causation. While their might be a correlation, it does not mean there is a causation.

The Great Depression is off topic - it had deflation, not inflation.

The 1970s stagflation is the easiest one. There was a oil embargo.

Decreased supply means higher prices. IIRC, 30% of the GNP inputs were energy based. So this drove up prices.

Of course, if 30% of your GNP inputs are energy based, and you cut those inputs by 25% you are going to get a wrecked economy.
Your telescope is pushing things far away too close together.

The US was never actually oil embargoed. Although the USA & Netherlands endured an "embargo" on oil supply in October-December 1973, from the Arab oil exporting countries, no one has been able to show the USA had any problem importing a barrel of oil. Indeed it is believed that the Saudis specifically set aside a supply to keep the US 6th Fleet (in the Mediterranean) fueled. Also recall that US domestic oil production had peaked (lower 48) in 1971- the US had only recently become a net oil importer.

What shortages there were at the gas pump were the result of misplaced policies to control the retail price of gasoline (& other refined products) NOT an actual shortage of crude oil.

Yes the move from $3/bl to $12/bl for a key input caused big disruptions to the economy. Basically oil producing states benefited as revenues and exploration took off. However the rest of the economy suffered. So there was a supply side shock to the economy (but, again, remember how big the US energy industry was in the US economy). There was a repeat of that shock in early 1979 when the Iranian oil workers went on strike, and oil went from $10ish per barrel to $40/ bl.

The inflation of the 1970s had many causes. One was that by the late 1960s, with the Vietnam War and the Draft, the US economy was already running at beyond full employment. It was also strongly unionised, and unions negotiated CPI+ contracts in the 1970s- thus creating a wage price spiral.

US macroeconomic policy was inflation oriented. Arthur Burns, the Chairman of the Fed, agreed with President Nixon (we have the tapes) not to raise interest rates during an Election year (Nixon believed he had lost in 1960 to Kennedy due to Fed Policy). A policy of imposition of wage & price controls, govt spending stimulus - it won Nixon the election but led to a "catch up" of prices thereafter.

Often overlooked is the general commodity price shock - commodity prices soared across the board. In particular the Russian wheat harvest failed, and the Russians came onto world markets driving the price of wheat back towards its 1910 all-time high (in recorded history, where we have data). *That* really did hit Americans in the pocket (although it briefly made farmers quite rich)-- food was a much higher percentage of family budgets than it is now.

So inflation was going to be a problem in the 1970s whatever happened. The 60s was a grand and glorious decade, globally, for economic growth. But imbalances had built up.

Then you had the first oil shock in late 1973. With CPI-linked contracts, labour costs went up. Producers (all industries) generally marked up prices to reflect higher input costs. Wage-price spiral ensued. This was a global phenomenon, not just USA.

There is also a break in the productivity data. From 1946-1972, roughly, productivity (and real wages) had grown at c 3-4% pa or over twice the historic average. That stopped, and has never been regained except in the late 1990s. It's likely that the vast increase in input costs led to a complete reshaping of the economy. For example over 20% of electricity production was with oil (in North America) - and that is now less than 2%. That supply side shock probably led to a decline in productivity growth while the economy adjusted itself. However, and the story is incomplete on this, it has never returned to its pre 1972 level, and we don't have a fully satisfactory explanation as to why*.

And the Fed did not have the full power to fight inflation until Paul Volker was appointed Chairman by President Carter in 1978 (?). One of many things of which history will judge Carter as prescient.

In 1979 when the Iranian oil crisis came, it was an empowered Fed with renewed independence. 1980-81 saw 21% interest rates, to break the expectations of higher inflation. It did so (in the UK & US in particular) at a huge cost to the "Rust Belt" industries and the people there.


To the OP: Equities do fine during inflation. During high inflation they may not be able to rapidly or fully pass on costs. So not a prefect hedge. But a decent one.

Now, the next question you have to ask is why we are having inflation. That is a harder one but it is the one that counts.
Dimson and Marsh found, I think, that equities do not correlate well with inflation.

What is true is that equities pay high returns, higher than they "should" pay if you look at the fundamentals, because equity prices are also far more volatile than they "should" be (that famous paper by Shiller). As they are a real asset (an ownership claim against companies with rising cash flows in the long run) they pay high real returns (but with high volatility; you have decades when equities are just lousy investments - from the late 1920s to the late 1930s, from 1966 to 1980, from the late 1990s to 2008.

Looking at the data of the 1970s it looks to me that:

- equities do well when inflation and interest rates are falling
- equities don't tend to do well when inflation and interest rates are rising
- supply or demand side negative shocks are bad for stocks as they are bad for the economy generally
- equities anticipate rather than follow. So they will anticipate Central Bank tightening before it happens, and when it does happen, often act with relief

* I tend to think about the long waves of innovation. Something like electric motors in US factories (rather than the old central power belt system) took 80 years or so to reach full use. So with the internet etc, we are only now beginning to see the big impacts (and they are not all productivity enhancing). The internet is about 50-55 years old, and business processes still have not fully adjusted. See David Edgerton The Shock of the Old - about the adoption of technology.

https://www.amazon.co.uk/dp/B003NSBBBI/ ... TF8&btkr=1

Also Mark Levinson's economic history of the 1970s & 80s

https://www.amazon.com/gp/product/B01M0 ... tkin_p1_i4

Commercial real estate is the obvious asset with the highest correlation to inflation, because rents tend to rise with inflation. However in a Covid-19 world it is unclear (to me) what constitutes a safe haven in CRE. Distribution & logistics centres, assuredly. Retail assuredly not. Offices? Apartments?
Last edited by Valuethinker on Wed Aug 12, 2020 11:29 am, edited 1 time in total.
Valuethinker
Posts: 41147
Joined: Fri May 11, 2007 11:07 am

Re: Equities and inflation

Post by Valuethinker »

ScubaHogg wrote: Wed Aug 12, 2020 3:15 am
rgs92 wrote: Wed Aug 12, 2020 12:31 am I always trust (well, my leap of faith here) that since inflation means higher prices, and companies are the ones raising prices, thus generating higher revenue, and the higher revenue will produce higher profits which will flow to you, the stock owner.

Pricing power is everything when you need to beat inflation.
Agreed.

It follows that since prices are higher, someone is collecting those higher prices. To a rough approximation, if it’s not companies in aggregate who is it?
What you see with oil, say, is a price rise leads (in the USA) to more drilling and exploration activity. So what is bad for California drivers is good for Texas, OK etc. However there is a time lag. In the 1970s, the Saudis and other oil producers piled up huge amounts of money, which took time to recycle. They bought trophy assets such as real estate in western cities, they spent huge amounts on new construction and new weapons systems - good for the likes of BAe & McDonnell Douglas. But that took a long time to feed through. By contrast in the fracking world, an oil price rise feeds through very quickly into more activity. Pay for roughnecks etc goes up.

Commodity prices are good for farmers, say. They buy new machinery, fix up old buildings etc. Price of farm land goes up.

For companies generally inflation leads to inflated profits & taxes due to under depreciation of assets - the replacement cost of assets rise but depreciation is charged against historic asset cost.
jimkinny
Posts: 1435
Joined: Sun Mar 14, 2010 1:51 pm

Re: Equities and inflation

Post by jimkinny »

Vanguard published a paper on this 5-10 years ago. Equities historically kept up with inflation over the long term. If I recall accurately, for the short term they found short term TIPS did best.
MathWizard
Posts: 4337
Joined: Tue Jul 26, 2011 1:35 pm

Re: Equities and inflation

Post by MathWizard »

Valuethinker wrote: Wed Aug 12, 2020 3:33 am
...


The US was never actually oil embargoed. Although the USA & Netherlands endured an "embargo" on oil supply in October-December 1973, from the Arab oil exporting countries, no one has been able to show the USA had any problem importing a barrel of oil. Indeed it is believed that the Saudis specifically set aside a supply to keep the US 6th Fleet (in the Mediterranean) fueled. Also recall that US domestic oil production had peaked (lower 48) in 1971- the US had only recently become a net oil importer.

.....

Commercial real estate is the obvious asset with the highest correlation to inflation, because rents tend to rise with inflation. However in a Covid-19 world it is unclear (to me) what constitutes a safe haven in CRE. Distribution & logistics centres, assuredly. Retail assuredly not. Offices? Apartments?
That you for this wealth of information. I lived through those times, but was not as much into finances as I am now.
You have provided me with another viewpoint.
Thanks.
Blue456
Posts: 1018
Joined: Tue Jun 04, 2019 5:46 am

Re: Equities and inflation

Post by Blue456 »

Northern Flicker wrote: Tue Aug 11, 2020 7:44 pm
TwoIdenticalIndexes wrote: Tue Aug 11, 2020 7:17 pm Shouldn't equities be shielded from inflation? Expected future cashflows should rise with inflation, shouldn't they?
Yes, but it is complex. Their gross revenue will rise, but so will their expenses-- payroll, expenses, materials or equipment used to make their products, etc. There are no guarantees that costs and revenues will rise at the same rate. Cost of capital will rise, but existing debt will be reduced in real terms.
So expenses go up and profits go up. The wild card here is that all debt goes down. So to some it up equities should be thriving during high inflation.
000
Posts: 2739
Joined: Thu Jul 23, 2020 12:04 am

Re: Equities and inflation

Post by 000 »

Northern Flicker wrote: Tue Aug 11, 2020 11:44 pm
000 wrote: Here are some other examples of inflationary periods:
...
Russia 1923: stocks wiped out
The Russian stock market was wiped out in 1917. In 1923 there was nothing left for inflation to wipe out.
Stocks did not actually go to zero until 1923.
ScubaHogg wrote: Wed Aug 12, 2020 3:13 am
000 wrote: Tue Aug 11, 2020 11:07 pm Russia 1923: stocks wiped out
Hungary 1946: stocks wiped out
China 1945 - 1949: stocks wiped out
I don’t think you can chalk these up to inflation. Russia and Chinese holders of equity were undoubtedly “wiped out” out by new regimes that were ideologically opposed to private property and confiscated everything. I assume the same happened in Hungry as a victorious USSR imposed a friendly communist government.
I did not claim stocks failed because of inflation; rather I claimed that stocks failed to protect against inflation, which is about what the OP asked. Moreover, the political changes, inflationary environment, and failure of stocks were all interrelated in those three cases.
Northern Flicker
Posts: 6499
Joined: Fri Apr 10, 2015 12:29 am

Re: Equities and inflation

Post by Northern Flicker »

The Russian stock exchange was closed during WW1 from 1914-1917. It reopened for a few months, and then shut down after the czar abdicated later in 1917. A multi-faction civil war for control of the country/empire ensued. From 1918 to 1923 there was no market to establish prices, so I'm unclear what basis there would be for saying the Russian stock market only went to zero in 1923.
Risk is not a guarantor of return.
000
Posts: 2739
Joined: Thu Jul 23, 2020 12:04 am

Re: Equities and inflation

Post by 000 »

Northern Flicker wrote: Wed Aug 12, 2020 4:22 pm The Russian stock exchange was closed during WW1 from 1914-1917. It reopened for a few months, and then shut down after the czar abdicated later in 1917. A multi-faction civil war for control of the country/empire ensued. From 1918 to 1923 there was no market to establish prices, so I'm unclear what basis there would be for saying the Russian stock market only went to zero in 1923.
The White cause did not fail until 1923, so the value of the stocks -- although not tradable -- was still non-zero before that. Also, stocks includes both exchange-traded and unlisted equity in business.
Northern Flicker
Posts: 6499
Joined: Fri Apr 10, 2015 12:29 am

Re: Equities and inflation

Post by Northern Flicker »

Valuethinker wrote: Commercial real estate is the obvious asset with the highest correlation to inflation, because rents tend to rise with inflation.
It depends on the type of real estate. Some commercial real estate like office space typically has very long leases. Residential real estate is probably going to be one of the better performing real estate subclasses during robust inflation.
Risk is not a guarantor of return.
Northern Flicker
Posts: 6499
Joined: Fri Apr 10, 2015 12:29 am

Re: Equities and inflation

Post by Northern Flicker »

000 wrote: Wed Aug 12, 2020 4:27 pm
Northern Flicker wrote: Wed Aug 12, 2020 4:22 pm The Russian stock exchange was closed during WW1 from 1914-1917. It reopened for a few months, and then shut down after the czar abdicated later in 1917. A multi-faction civil war for control of the country/empire ensued. From 1918 to 1923 there was no market to establish prices, so I'm unclear what basis there would be for saying the Russian stock market only went to zero in 1923.
The White cause did not fail until 1923, so the value of the stocks -- although not tradable -- was still non-zero before that. Also, stocks includes both exchange-traded and unlisted equity in business.
I don't think unlisted business equity is a part of the discussion about the behavior of publicly-traded stocks (ones anyone with cash can invest in) during inflation. If I had held publicly-traded Russian stock in 1918, how would I have realized any value from it?
Risk is not a guarantor of return.
000
Posts: 2739
Joined: Thu Jul 23, 2020 12:04 am

Re: Equities and inflation

Post by 000 »

Northern Flicker wrote: Wed Aug 12, 2020 4:32 pm I don't think unlisted business equity is a part of the discussion about the behavior of publicly-traded stocks (ones anyone with cash can invest in) during inflation.
The OP's question was "Shouldn't equities be shielded from inflation?" (emphasis mine).
Northern Flicker wrote: Wed Aug 12, 2020 4:32 pm If I had held publicly-traded Russian stock in 1918, how would I have realized any value from it?
How did people in the US realize value from their exchange traded stocks when the NYSE was closed for four months in 1914? Did they go to zero? Does equity in a unlisted or non-tradable business have zero value?

More to the point, you would have potentially realized value from it if the war went the other way.
Northern Flicker
Posts: 6499
Joined: Fri Apr 10, 2015 12:29 am

Re: Equities and inflation

Post by Northern Flicker »

Here is a detailed analysis of the Russian stock market pre-revolution:

https://www.investmentoffice.com/Observ ... ution.html

At the end of the article:
Of course, by 1918, all of the Russian shares were worthless...
Risk is not a guarantor of return.
000
Posts: 2739
Joined: Thu Jul 23, 2020 12:04 am

Re: Equities and inflation

Post by 000 »

Northern Flicker wrote: Wed Aug 12, 2020 4:39 pm Here is a detailed analysis of the Russian stock market pre-revolution:

https://www.investmentoffice.com/Observ ... ution.html

At the end of the article:
Of course, by 1918, all of the Russian shares were worthless...
Sure, if in hindsight we assume the outcome of the war...

But I think we've gotten too caught up on the Russia question. What about all the other inflationary incidents I posted upthread?
User avatar
packer16
Posts: 1414
Joined: Sat Jan 04, 2014 2:28 pm

Re: Equities and inflation

Post by packer16 »

Inflation effects equity in two ways via cash flows and discount rate. For firms who can pass along price increases, the firm cash flows will increase. For those who cannot, the cash flows will not keep up with inflation. The discount rate will increase as inflation and interest rates increase. Also, with increased inflation, real interest rates may also go up as there is some uncertainty in inflation and the most effective way to reduce inflation is high real rates.

Packer
Buy cheap and something good might happen
User avatar
packer16
Posts: 1414
Joined: Sat Jan 04, 2014 2:28 pm

Re: Equities and inflation

Post by packer16 »

000 wrote: Wed Aug 12, 2020 4:45 pm
Northern Flicker wrote: Wed Aug 12, 2020 4:39 pm Here is a detailed analysis of the Russian stock market pre-revolution:

https://www.investmentoffice.com/Observ ... ution.html

At the end of the article:
Of course, by 1918, all of the Russian shares were worthless...
Sure, if in hindsight we assume the outcome of the war...

But I think we've gotten too caught up on the Russia question. What about all the other inflationary incidents I posted upthread?
All those periods of time except the US in the 1970s and Germany in 1923, the government got involved in nationalizations which destroyed any value the equity capitalist held.

Packer
Buy cheap and something good might happen
000
Posts: 2739
Joined: Thu Jul 23, 2020 12:04 am

Re: Equities and inflation

Post by 000 »

packer16 wrote: Wed Aug 12, 2020 4:49 pm
000 wrote: Wed Aug 12, 2020 4:45 pm
Northern Flicker wrote: Wed Aug 12, 2020 4:39 pm Here is a detailed analysis of the Russian stock market pre-revolution:

https://www.investmentoffice.com/Observ ... ution.html

At the end of the article:
Of course, by 1918, all of the Russian shares were worthless...
Sure, if in hindsight we assume the outcome of the war...

But I think we've gotten too caught up on the Russia question. What about all the other inflationary incidents I posted upthread?
All those periods of time except the US in the 1970s and Germany in 1923, the government got involved in nationalizations which destroyed any value the equity capitalist held.

Packer
Sure, if we just ignore all the times stocks failed, I guess they always go up :oops:
petulant
Posts: 1901
Joined: Thu Sep 22, 2016 1:09 pm

Re: Equities and inflation

Post by petulant »

000 wrote: Wed Aug 12, 2020 4:45 pm
Northern Flicker wrote: Wed Aug 12, 2020 4:39 pm Here is a detailed analysis of the Russian stock market pre-revolution:

https://www.investmentoffice.com/Observ ... ution.html

At the end of the article:
Of course, by 1918, all of the Russian shares were worthless...
Sure, if in hindsight we assume the outcome of the war...

But I think we've gotten too caught up on the Russia question. What about all the other inflationary incidents I posted upthread?
Literally every single "failed to protect" scenario you posted involved a Communist takeover. It's like evaluating whether firesafes protect from fires and then looking at situations where a burglar stole a firesafe after a fire to proclaim firesafes are unreliable. I'm sorry, no, that's about burglars. You're going to have to do more work if you want to show the burglars are relevant. The question is, do firesafes protect from fires? The answer is, yes, based on the historical record, placing documents in a firesafe protects the documents from fire.
User avatar
packer16
Posts: 1414
Joined: Sat Jan 04, 2014 2:28 pm

Re: Equities and inflation

Post by packer16 »

000 wrote: Wed Aug 12, 2020 4:53 pm
packer16 wrote: Wed Aug 12, 2020 4:49 pm
000 wrote: Wed Aug 12, 2020 4:45 pm
Northern Flicker wrote: Wed Aug 12, 2020 4:39 pm Here is a detailed analysis of the Russian stock market pre-revolution:

https://www.investmentoffice.com/Observ ... ution.html

At the end of the article:
Of course, by 1918, all of the Russian shares were worthless...
Sure, if in hindsight we assume the outcome of the war...

But I think we've gotten too caught up on the Russia question. What about all the other inflationary incidents I posted upthread?
All those periods of time except the US in the 1970s and Germany in 1923, the government got involved in nationalizations which destroyed any value the equity capitalist held.

Packer
Sure, if we just ignore all the times stocks failed, I guess they always go up :oops:
It is valid with high inflation that you have to determine if the system will survive or if nationalizations will occur. If nationalization occur then you are toast. I think you can observe serial nationalizers & stay away or get your money out of the country.

Packer
Buy cheap and something good might happen
000
Posts: 2739
Joined: Thu Jul 23, 2020 12:04 am

Re: Equities and inflation

Post by 000 »

petulant wrote: Wed Aug 12, 2020 5:04 pm
000 wrote: Wed Aug 12, 2020 4:45 pm
Northern Flicker wrote: Wed Aug 12, 2020 4:39 pm Here is a detailed analysis of the Russian stock market pre-revolution:

https://www.investmentoffice.com/Observ ... ution.html

At the end of the article:
Of course, by 1918, all of the Russian shares were worthless...
Sure, if in hindsight we assume the outcome of the war...

But I think we've gotten too caught up on the Russia question. What about all the other inflationary incidents I posted upthread?
Literally every single "failed to protect" scenario you posted involved a Communist takeover. It's like evaluating whether firesafes protect from fires and then looking at situations where a burglar stole a firesafe after a fire to proclaim firesafes are unreliable. I'm sorry, no, that's about burglars. You're going to have to do more work if you want to show the burglars are relevant. The question is, do firesafes protect from fires? The answer is, yes, based on the historical record, placing documents in a firesafe protects the documents from fire.
You're making the mistake of assuming independent events. As I stated upthread, the political changes, inflationary environment, and failure of stocks were all interrelated in the three cases above. So they are reasonable examples.

Moreover, if one is worried about inflation, one should not worry about it in a vacuum. High inflation is usually caused by and/or results in changes in Governance, so you can't ignore instances of inflation where political changes are part of the reason stocks failed.

So far: we have three instances where stocks failed and two where they barely kept up. Can you answer my questions upthread about other inflationary scenarios so we can form a more complete picture? Thanks.
000
Posts: 2739
Joined: Thu Jul 23, 2020 12:04 am

Re: Equities and inflation

Post by 000 »

packer16 wrote: Wed Aug 12, 2020 5:07 pm It is valid with high inflation that you have to determine if the system will survive or if nationalizations will occur. If nationalization occur then you are toast. I think you can observe serial nationalizers & stay away or get your money out of the country.

Packer
Not helpful to investors in the situations mentioned upthread as Russia, China, and Hungary were not at the times in question known to be "serial nationalizers".
RickyAZ
Posts: 49
Joined: Sun Dec 08, 2019 6:27 pm

Re: Equities and inflation

Post by RickyAZ »

Yes, appears that a if you can avoid a communist revolution you should do ok.

Inflation can come on very quickly, faster than authorities can act in many cases. Probably a good reminder that your cash holding can be decimated and you may want to avoid being in a position where that could be a problem.
User avatar
packer16
Posts: 1414
Joined: Sat Jan 04, 2014 2:28 pm

Re: Equities and inflation

Post by packer16 »

000 wrote: Wed Aug 12, 2020 5:14 pm
packer16 wrote: Wed Aug 12, 2020 5:07 pm It is valid with high inflation that you have to determine if the system will survive or if nationalizations will occur. If nationalization occur then you are toast. I think you can observe serial nationalizers & stay away or get your money out of the country.

Packer
Not helpful to investors in the situations mentioned upthread as Russia, China, and Hungary were not at the times in question known to be "serial nationalizers".
They were all one-party autocracies which should have given hints that property rights may not be enforced if you disagreed with the one-party.

Packer
Buy cheap and something good might happen
petulant
Posts: 1901
Joined: Thu Sep 22, 2016 1:09 pm

Re: Equities and inflation

Post by petulant »

000 wrote: Wed Aug 12, 2020 5:11 pm
petulant wrote: Wed Aug 12, 2020 5:04 pm
000 wrote: Wed Aug 12, 2020 4:45 pm
Northern Flicker wrote: Wed Aug 12, 2020 4:39 pm Here is a detailed analysis of the Russian stock market pre-revolution:

https://www.investmentoffice.com/Observ ... ution.html

At the end of the article:
Of course, by 1918, all of the Russian shares were worthless...
Sure, if in hindsight we assume the outcome of the war...

But I think we've gotten too caught up on the Russia question. What about all the other inflationary incidents I posted upthread?
Literally every single "failed to protect" scenario you posted involved a Communist takeover. It's like evaluating whether firesafes protect from fires and then looking at situations where a burglar stole a firesafe after a fire to proclaim firesafes are unreliable. I'm sorry, no, that's about burglars. You're going to have to do more work if you want to show the burglars are relevant. The question is, do firesafes protect from fires? The answer is, yes, based on the historical record, placing documents in a firesafe protects the documents from fire.
You're making the mistake of assuming independent events. As I stated upthread, the political changes, inflationary environment, and failure of stocks were all interrelated in the three cases above. So they are reasonable examples.

Moreover, if one is worried about inflation, one should not worry about it in a vacuum. High inflation is usually caused by and/or results in changes in Governance, so you can't ignore instances of inflation where political changes are part of the reason stocks failed.

So far: we have three instances where stocks failed and two where they barely kept up. Can you answer my questions upthread about other inflationary scenarios so we can form a more complete picture? Thanks.
Sorry, I'm not mistaken at all. Of course I am aware that inflation was related to the wars that destabilized those countries and resulted in the possibility of a Communist takeover. Likewise, you could argue that an arsonist can set a fire and then steal the firesafe during the tumult. Did the firesafe protect the documents from the fire? You're saying no, but I'm saying that's silly and irrelevant.

The reality is that inflation can happen outside of destabilization, and it's a reasonable question to wonder about even a slight uptick in inflation from the ~1.5% level we've been experiencing to, say, 3-4%. What would perform better in that environment?

You're rushing to episodes of conflict and war as fully relevant data points, but you just haven't made the case. OP is talking about the best brand of firesafe to buy. We're not interested in hearing about the threat of burglars during the fire.
000
Posts: 2739
Joined: Thu Jul 23, 2020 12:04 am

Re: Equities and inflation

Post by 000 »

packer16 wrote: Wed Aug 12, 2020 6:07 pm They were all one-party autocracies which should have given hints that property rights may not be enforced if you disagreed with the one-party.

Packer
The regime changes happened after the presumed investment in stocks.

petulant wrote: Wed Aug 12, 2020 6:37 pm Sorry, I'm not mistaken at all. Of course I am aware that inflation was related to the wars that destabilized those countries and resulted in the possibility of a Communist takeover. Likewise, you could argue that an arsonist can set a fire and then steal the firesafe during the tumult. Did the firesafe protect the documents from the fire? You're saying no, but I'm saying that's silly and irrelevant.

The reality is that inflation can happen outside of destabilization, and it's a reasonable question to wonder about even a slight uptick in inflation from the ~1.5% level we've been experiencing to, say, 3-4%. What would perform better in that environment?

You're rushing to episodes of conflict and war as fully relevant data points, but you just haven't made the case. OP is talking about the best brand of firesafe to buy. We're not interested in hearing about the threat of burglars during the fire.
Social/political instability and inflation often go hand in hand.

War was not a factor in any of the most recent three examples I gave:
Argentina 1970s - 1980s: Does anyone know how stocks performed?
Zimbabwe 2006 - 2008: Does anyone know how stocks performed?
Venezuela recently: Does anyone know how stocks performed?

War was also not a factor in the 1923 Weimar Republic or 1970s US stagflation, where stocks returned approx. 0% real with high volatility.

If you don't like my examples, can you present some other ones?


As far as a theoretical perspective, there is a concern that loss of USD purchasing power could hurt US stocks given the high proportion of foreign revenue. Also, severe enough inflation could result in reduction of consumer demand and/or political issues which could be harmful to US stocks.
User avatar
nisiprius
Advisory Board
Posts: 41970
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Equities and inflation

Post by nisiprius »

TwoIdenticalIndexes wrote: Tue Aug 11, 2020 7:17 pm Shouldn't equities be shielded from inflation? Expected future cashflows should rise with inflation, shouldn't they? Is the problem really the devaluation of the dollar which might occur due to inflation? Would foreign firms with cashflows denominated in other currencies benefit from inflation in the USA?
Benjamin Graham was Warren Buffett's mentor. With regard to stocks and inflation, he wrote this:
In 'The Intelligent Investor,' p. 20, 4th edition, 1973, Benjamin Graham wrote:On this point we can be categorical. There is no close time connection between inflationary (or deflationary) conditions and the movement of common-stock earnings and prices. The obvious example is the recent period 1966-1970. The rise in the cost of living was 22%... but both stock earnings and stock prices have declined since 1965. There are similar contradictions in both directions in the record of previous five-year periods.
The plain fact is that most things have a general tendency to track inflation over sufficiently long periods of time. It is not guaranteed and there can be periods of disappointment.

The things that do not--nominal bonds, physical currency, and non-interest-bearing checking accounts--are the exceptions.

Therefore, practically anything but nominal bonds, physical currency, and non-interest-bearing checking accounts can be touted as an "inflation hedge," and practically everything has been. Even ordinary bank accounts, as long as you take care to choose reasonably competitive ones.

The exchange ratio between dollars and foreign currencies fluctuates, yes, but that is not any kind of guaranteed inflation protection, and it works both ways--unless, of course, you believe that the US is fiscally irresponsible and that every other country in the world is more fiscally than the US.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Northern Flicker
Posts: 6499
Joined: Fri Apr 10, 2015 12:29 am

Re: Equities and inflation

Post by Northern Flicker »

000 wrote: Wed Aug 12, 2020 4:53 pm
packer16 wrote: Wed Aug 12, 2020 4:49 pm
000 wrote: Wed Aug 12, 2020 4:45 pm
Northern Flicker wrote: Wed Aug 12, 2020 4:39 pm Here is a detailed analysis of the Russian stock market pre-revolution:

https://www.investmentoffice.com/Observ ... ution.html

At the end of the article:
Of course, by 1918, all of the Russian shares were worthless...
Sure, if in hindsight we assume the outcome of the war...

But I think we've gotten too caught up on the Russia question. What about all the other inflationary incidents I posted upthread?
All those periods of time except the US in the 1970s and Germany in 1923, the government got involved in nationalizations which destroyed any value the equity capitalist held.

Packer
Sure, if we just ignore all the times stocks failed, I guess they always go up :oops:
No, we are drawing a distinction between hyperinflation and confiscation, which are two separate risks.
Risk is not a guarantor of return.
000
Posts: 2739
Joined: Thu Jul 23, 2020 12:04 am

Re: Equities and inflation

Post by 000 »

Northern Flicker wrote: Wed Aug 12, 2020 8:23 pm
000 wrote: Wed Aug 12, 2020 4:53 pm
packer16 wrote: Wed Aug 12, 2020 4:49 pm
000 wrote: Wed Aug 12, 2020 4:45 pm
Northern Flicker wrote: Wed Aug 12, 2020 4:39 pm Here is a detailed analysis of the Russian stock market pre-revolution:

https://www.investmentoffice.com/Observ ... ution.html

At the end of the article:
Sure, if in hindsight we assume the outcome of the war...

But I think we've gotten too caught up on the Russia question. What about all the other inflationary incidents I posted upthread?
All those periods of time except the US in the 1970s and Germany in 1923, the government got involved in nationalizations which destroyed any value the equity capitalist held.

Packer
Sure, if we just ignore all the times stocks failed, I guess they always go up :oops:
No, we are drawing a distinction between hyperinflation and confiscation, which are two separate risks.
What if hyperinflation is a likely cause of confiscation? Not worth considering in the discussion?
alex_686
Posts: 6841
Joined: Mon Feb 09, 2015 2:39 pm

Re: Equities and inflation

Post by alex_686 »

So instead of cherry picking historical events, maybe we should take a step back. We can cheery pick all we want. Can anybody think of a reason why inflation, in and of itself, would have a affect on the real return of equities? What is the casual link here?

There have been a decent set of academic articles which have examined this issue. What they did was compare similar unlevered companies in different countries at the same time. So the companies had the same access to economic forces. However they faced different interest rate environments. The result was that similar companies produced the same real returns. Inflation was not a factor.

The 80s and 90s is where most of this analysis takes place. At that point most companies where still mainly national, not multinational. Being multinational, as most companies are today, makes this analysis much harder.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
User avatar
packer16
Posts: 1414
Joined: Sat Jan 04, 2014 2:28 pm

Re: Equities and inflation

Post by packer16 »

000 wrote: Wed Aug 12, 2020 6:52 pm
packer16 wrote: Wed Aug 12, 2020 6:07 pm They were all one-party autocracies which should have given hints that property rights may not be enforced if you disagreed with the one-party.

Packer
The regime changes happened after the presumed investment in stocks.

petulant wrote: Wed Aug 12, 2020 6:37 pm Sorry, I'm not mistaken at all. Of course I am aware that inflation was related to the wars that destabilized those countries and resulted in the possibility of a Communist takeover. Likewise, you could argue that an arsonist can set a fire and then steal the firesafe during the tumult. Did the firesafe protect the documents from the fire? You're saying no, but I'm saying that's silly and irrelevant.

The reality is that inflation can happen outside of destabilization, and it's a reasonable question to wonder about even a slight uptick in inflation from the ~1.5% level we've been experiencing to, say, 3-4%. What would perform better in that environment?

You're rushing to episodes of conflict and war as fully relevant data points, but you just haven't made the case. OP is talking about the best brand of firesafe to buy. We're not interested in hearing about the threat of burglars during the fire.
Social/political instability and inflation often go hand in hand.

War was not a factor in any of the most recent three examples I gave:
Argentina 1970s - 1980s: Does anyone know how stocks performed?
Zimbabwe 2006 - 2008: Does anyone know how stocks performed?
Venezuela recently: Does anyone know how stocks performed?

War was also not a factor in the 1923 Weimar Republic or 1970s US stagflation, where stocks returned approx. 0% real with high volatility.

If you don't like my examples, can you present some other ones?


As far as a theoretical perspective, there is a concern that loss of USD purchasing power could hurt US stocks given the high proportion of foreign revenue. Also, severe enough inflation could result in reduction of consumer demand and/or political issues which could be harmful to US stocks.
Based upon history these had autocracies before and is some cases after inflation.

Packer
Buy cheap and something good might happen
Northern Flicker
Posts: 6499
Joined: Fri Apr 10, 2015 12:29 am

Re: Equities and inflation

Post by Northern Flicker »

000 wrote: Wed Aug 12, 2020 8:24 pm
Northern Flicker wrote: Wed Aug 12, 2020 8:23 pm
000 wrote: Wed Aug 12, 2020 4:53 pm
packer16 wrote: Wed Aug 12, 2020 4:49 pm
000 wrote: Wed Aug 12, 2020 4:45 pm

Sure, if in hindsight we assume the outcome of the war...

But I think we've gotten too caught up on the Russia question. What about all the other inflationary incidents I posted upthread?
All those periods of time except the US in the 1970s and Germany in 1923, the government got involved in nationalizations which destroyed any value the equity capitalist held.

Packer
Sure, if we just ignore all the times stocks failed, I guess they always go up :oops:
No, we are drawing a distinction between hyperinflation and confiscation, which are two separate risks.
What if hyperinflation is a likely cause of confiscation? Not worth considering in the discussion?
It is not worthy of consideration when it is not factual.
Last edited by Northern Flicker on Thu Aug 13, 2020 11:44 am, edited 1 time in total.
Risk is not a guarantor of return.
Post Reply