If I fear inflation, should I overweight international stocks/gold?

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invest2bfree
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If I fear inflation, should I overweight international stocks/gold?

Post by invest2bfree »

The way the dollar is behaving is that it could head lot lower like DXY can hit 60s or lower in a year.

Which could make the Euro and other currencies very expensive.

This could bring a heavy bout of inflation to our shores, if we increase interest rates the economy will come crashing down.

On the other Gary shilling says as long as we do most of our manufacturing outside the US the inflation is not possible only deflation is possible.
Last edited by invest2bfree on Sun Aug 30, 2020 10:24 am, edited 1 time in total.
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texanghost
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Re: Can we get Stagflation Like In the 70s again?

Post by texanghost »

I doubt it.

As I understand it, the main cause of 70s stagflation was oil supply shocks which increased the price of everything in the economy since so much production and so many services were dependent on oil. An economy wide supply shock that affects all goods and services in the same way is unlikely since so much oil production happens domestically now. Oil prices are super low, and we're less dependent on it than we used to be with renewable energy in a lot of the country.

I'm no expert, but if I had to speculate, I'd guess that the DXY drop reflects a drop in demand for dollars for things like tourism or money spent by people visiting the US. People simply can't come here and buy things, so they don't buy USD. However, they still buy things denominated in dollars, like oil and US exports.

If you take a look at this: https://tradingeconomics.com/united-states/exports

you'll see a large drop in US exports but notice it rapidly coming back. If that trend continues, demand for USD will rise and prevent huge drops in the value of the dollar (especially not down to the 60s). That's my theory anyway.

Even if DXY value drops, though, it'd come back as US exports would become cheaper and more attractive. Moreover one can hedge against it in their portfolio by acquiring non dollar denominated assets, like international stocks.
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invest2bfree
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Re: Can we get Stagflation Like In the 70s again?

Post by invest2bfree »

I have been two minds on international.

On one end international outperformed us during a brief period between 2002-2008, after that they have been down for the last 12 years. If there was no financial crisis or a smaller one then I was always wondering what could have happened.
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Robot Monster
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Re: Can we get Stagflation Like In the 70s again?

Post by Robot Monster »

It would be desirable, I think, for us to get a better grasp on the underlying investment decision you are grappling with, which would transform your question about economics into a question about investing.
“I delight in what I fear.” ― Shirley Jackson
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invest2bfree
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Re: Can we get Stagflation Like In the 70s again?

Post by invest2bfree »

Robot Monster wrote: Sun Aug 30, 2020 9:12 am It would be desirable, I think, for us to get a better grasp on the underlying investment decision you are grappling with, which would transform your question about economics into a question about investing.
So ultimately whether I should invest in international or not?I looked through VXUS for the last 11 years it has been absymal.

I could have just invested in tlt which is a treasury long bond and gotten better results with less risk.

https://www.portfoliovisualizer.com/bac ... ion2_2=100


Now if the inflation is going to come roaring back then diversifying into some gold and international is good.
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stan1
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Re: Can we get Stagflation Like In the 70s again?

Post by stan1 »

Unfortunately many of us took a few high school or entry level college economics classes where we talked about some high level principles and maybe plugged some numbers into equations that made it appear the economy could be modeled in a simple way. None of that is true, in large part because there are extensive human interfaces which cannot be predicted and modeled. I do remember my economics professor saying that repeatedly .

Stagflation is possible again. It likely won't be because of human decisions and actions about oil. I'm not going to even try to predict what human decisions and actions might cause stagflation.
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Re: Can we get Stagflation Like In the 70s again?

Post by Robot Monster »

invest2bfree wrote: Sun Aug 30, 2020 9:27 am
Robot Monster wrote: Sun Aug 30, 2020 9:12 am It would be desirable, I think, for us to get a better grasp on the underlying investment decision you are grappling with, which would transform your question about economics into a question about investing.
So ultimately whether I should invest in international or not?I looked through VXUS for the last 11 years it has been absymal.

I could have just invested in tlt which is a treasury long bond and gotten better results with less risk.

https://www.portfoliovisualizer.com/bac ... ion2_2=100


Now if the inflation is going to come roaring back then diversifying into some gold and international is good.
Okay, so your question is basically, "If I fear inflation, should I overweight international stocks/gold?" You may consider updating your thread title. One of the reasons I'm overweight international stocks is because of diversification against the US dollar and inflation worries. I don't care about international's underperformance, personally. I view it like having insurance. Usually insurance doesn't have any return.

As to the likelihood of inflation coming roaring back, I think many people would answer that with a simple "no one knows." as the presiding philosophy around here is the ignore economic predictions. I see someone posted a Vanguard article predicting it will not happen; trouble is, Vanguard is often wrong.

***
"Rampant 1970s-style inflation will not return. The easy money policies of central banks worldwide has helped push up gold prices and spawned, in some quarters, fears of a return of runaway inflation. The Fed's new inflation messaging may help stoke those fears. But aging demographics in developed markets, technological innovations, and the likely slow economic recovery as a result of the COVID-19 crisis should limit inflationary pressures. Vanguard believes inflation could trend gradually higher but will likely remain below the Fed's 2% target."
https://advisors.vanguard.com/insights/ ... ixedincome
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UpperNwGuy
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Re: Can we get Stagflation Like In the 70s again?

Post by UpperNwGuy »

OP, it sounds like you plan to do some tinkering with your portfolio. Are you sure that's a wise idea? Why not just stay the course?
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Re: Can we get Stagflation Like In the 70s again?

Post by Robot Monster »

UpperNwGuy wrote: Sun Aug 30, 2020 10:04 am OP, it sounds like you plan to do some tinkering with your portfolio. Are you sure that's a wise idea? Why not just stay the course?
And if someone's course sucks? A person may come to realize their asset allocation isn't very smart. Perhaps, for instance, they realize they've allocated too much to cash in the expectation rates would rise. Would you tell someone with an all-cash portfolio, who is considering a reallocation, to stay the course?

Must also say we shouldn't assume everyone knows what that expression means. I like Rick Derek's definition:
"Establish a reasonable asset allocation based on your needs, select low-cost funds to represent those asset classes, implement the allocation, rebalance occasionally."
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Re: Can we get Stagflation Like In the 70s again?

Post by case_of_ennui »

stan1 wrote: Sun Aug 30, 2020 9:30 am Unfortunately many of us took a few high school or entry level college economics classes where we talked about some high level principles and maybe plugged some numbers into equations that made it appear the economy could be modeled in a simple way. None of that is true, in large part because there are extensive human interfaces which cannot be predicted and modeled. I do remember my economics professor saying that repeatedly .

You know, for a while I regretted never having taken any economics classes in college. Your comment just made me realize that could actually be a good thing. What do they call it? Knowing just enough to be dangerous? Maybe I should be glad I just don't know any of it at all.
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Re: If I fear inflation, should I overweight international stocks/gold?

Post by JBTX »

invest2bfree wrote: Sun Aug 30, 2020 8:36 am The way the dollar is behaving is that it could head lot lower like DXY can hit 60s or lower in a year.

Which could make the Euro and other currencies very expensive.

This could bring a heavy bout of inflation to our shores, if we increase interest rates the economy will come crashing down.

On the other Gary shilling says as long as we do most of our manufacturing outside the US the inflation is not possible only deflation is possible.
I've always thought having international was good for diversification purposes, and a defense against single home/country risk. I still do. As to gold, over very long terms it can have some positive diversification effects, and can be a hedge against future unexpected inflation and negative real interest rates. However, you tend to have to be in it before the fears become rampant. Jumping into gold after everybody fears inflation is too late. As a straight up period to period actual inflation hedge, gold is pretty bad. From the early 80s to 2000 gold last 2/3 of its value, while consumer prices roughly doubled.
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Re: If I fear inflation, should I overweight international stocks/gold?

Post by Robot Monster »

JBTX wrote: Sun Aug 30, 2020 1:11 pm Jumping into gold after everybody fears inflation is too late.
Does everybody fear inflation? After all, the 10-year breakeven sits at only 1.77%. Seems rather tame.
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Re: If I fear inflation, should I overweight international stocks/gold?

Post by JBTX »

Robot Monster wrote: Sun Aug 30, 2020 2:02 pm
JBTX wrote: Sun Aug 30, 2020 1:11 pm Jumping into gold after everybody fears inflation is too late.
Does everybody fear inflation? After all, the 10-year breakeven sits at only 1.77%. Seems rather tame.
https://fred.stlouisfed.org/series/T10YIE
I don't mean "everybody" literally, but the price of gold has gone up about 50% in recent history, largely due to inflation / currency devaluation / excess money supply fears. Gold tends to jump in spikes and if you miss the spikes you miss much of the inflation protection.

But you are correct, the bond market is not signaling it at all. We are living in unique times. I tend to think we are experiencing a different kind of inflation, not so much consumer price inflation but asset inflation, and ironically / counterintuitively that includes bonds.
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Re: If I fear inflation, should I overweight international stocks/gold?

Post by heyyou »

Choose an allocation that you can stay with from now on.
I suppose I will just have to muddle through whatever economic situation does occur. Patience is fullness.
So far, trying to allocate to buffer every possible scenario has been too expensive when the buffers were not being productive for decades. Note that with high inflation, the buffers for low inflation will lose significant value, and vice versa at some other time when the currently shiny gold goes nowhere for another decade or two.
I can more easily just adapt my spending when necessary. Other should do what suits them long term, as opposed to doing whatever is proposed by this week's media favorite. By next week or next month, fresh news with have a different pundit advocating an even newer strategy.

Those who do not sell out when prices are down, do not need the portfolio buffers that are often recommended to the public.
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Re: If I fear inflation, should I overweight international stocks/gold?

Post by k b »

If inflation is your worry, the last 10+ years show that equities (broad market) are a better hedge than gold.

If USD depreciation is your worry, some intl exposure could be good. But I find it difficult to imagine a world in which the RoW performs well when US economy or the USD drops precipitously. If Shilling is right and there is indeed a US deflation, I cannot imagine the RoW doing well over an extended period.

More important Q is what are you hedging against? As an example, if you are planning to retire in the Eurozone in the next few years, maybe your worry about USD depreciation is justified. If all your expenses are USD based and you will be in the US long-term, I would do the three fund portfolio (perhaps with some minor modifications to suit your risk appetite).
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Re: If I fear inflation, should I overweight international stocks/gold?

Post by geerhardusvos »

invest2bfree wrote: Sun Aug 30, 2020 8:36 am The way the dollar is behaving is that it could head lot lower like DXY can hit 60s or lower in a year.

Which could make the Euro and other currencies very expensive.

This could bring a heavy bout of inflation to our shores, if we increase interest rates the economy will come crashing down.

On the other Gary shilling says as long as we do most of our manufacturing outside the US the inflation is not possible only deflation is possible.
Nah. Overweight in equities and enjoy the ride!
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Re: If I fear inflation, should I overweight international stocks/gold?

Post by 000 »

I own both.
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Re: If I fear inflation, should I overweight international stocks/gold?

Post by ray.james »

https://www.cnbc.com/2020/08/30/warren- ... anies.html

Just interesting. Although I have 50% in international, I do not understand this bet. Why not China or India or Australia or Hungary. I am pretty sure Buffet will expand in the next annual call.
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Re: If I fear inflation, should I overweight international stocks/gold?

Post by abuss368 »

I would hold a balanced portfolio with total market index funds and stay the course.
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Re: If I fear inflation, should I overweight international stocks/gold?

Post by columbia »

I agree that equities are your best bet. Having said:


1. Why do you think that any inflation will be higher than what the market is currently signing?
2. Why do you believe that said (presumed) inflation will be higher in the US than elsewhere?
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Re: If I fear inflation, should I overweight international stocks/gold?

Post by rockstar »

Why do you fear inflation?

We have had very little for nearly two decades. And this pretty much corresponds to stagnant wages over the same time frame for a good chunk of the population.
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Re: If I fear inflation, should I overweight international stocks/gold?

Post by PicassoSparks »

Everyone has heard that the Fed is printing money and they think that leads to inflation.
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Re: If I fear inflation, should I overweight international stocks/gold?

Post by statefan03 »

TIPS ?
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Re: If I fear inflation, should I overweight international stocks/gold?

Post by Dottie57 »

I have international because I am a citizen of the world so want some participation in owning companies outside my home country. I underweight international because of home country bias.

No gold beyond some pieces of jewelry and whatever is in index funds.
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Re: If I fear inflation, should I overweight international stocks/gold?

Post by Robot Monster »

ray.james wrote: Sun Aug 30, 2020 8:03 pm https://www.cnbc.com/2020/08/30/warren- ... anies.html

Just interesting. Although I have 50% in international, I do not understand this bet. Why not China or India or Australia or Hungary. I am pretty sure Buffet will expand in the next annual call.
So, Berkshire just bought a Canadian gold miner, and now it's going Japan on us? Whenever I've invested internationally, I've felt a slight tinge of disapproval coming from Buffett, who advocates 100% US stocks. Gonna feel less guilty next time.

I just wrote a post in another thread about Japan's underperformance...

***

From Jan 1997 - Jun 2020 $10,000 has turned into:
U.S. -- $63,692
Switzerland -- $54,173
Australia -- $45,627
Canada -- $44,040
Japan -- $14,432

I find it not only interesting, but outright amusing that the country the market-cap international index leans into is Japan--its the top holding! If the winning formula is to pick that which has performed best over the relatively recent past, seems perhaps unfortunate that the passive index has chained itself to such an apparently losing strategy. Surely actively managed international funds would correct this, right? A no-brainer, right? Yet, the actively managed Vanguard International Core Stock Fund, just like its passive cousin, has Japan as its top country-allocation! (Even Vanguard International Growth chooses Japan as its third top country-allocation.)

Now let us look at the net assets for single-country-funds for those countries. Surely people are taking the opportunity with these to pounce on the best performing international countries, then piling mindlessly into Japan, an I right? Shockingly:
iShares MSCI Australia ETF -- $1,257,461,425
iShares MSCI Canada ETF -- $2,280,373,618
iShares MSCI Switzerland ETF -- $1,718,614,287
iShares MSCI Japan ETF -- $9,899,103,170

So strange.
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Re: If I fear inflation, should I overweight international stocks/gold?

Post by asif408 »

Robot Monster wrote: Mon Aug 31, 2020 9:53 am I find it not only interesting, but outright amusing that the country the market-cap international index leans into is Japan--its the top holding! If the winning formula is to pick that which has performed best over the relatively recent past, seems perhaps unfortunate that the passive index has chained itself to such an apparently losing strategy. Surely actively managed international funds would correct this, right? A no-brainer, right? Yet, the actively managed Vanguard International Core Stock Fund, just like its passive cousin, has Japan as its top country-allocation! (Even Vanguard International Growth chooses Japan as its third top country-allocation.
You do realize it was much worse in the late 1980s? IIRC, Japan ended up being more than 60% of the EAFE index in the late 1980s. It's been on a decline since then, for the obvious reason of nosebleed valuations it reached in the late 1980s. From the early 1980s to the mid 2010s Japan had valuation levels dramatically higher than the other countries you cited.

Japan's valuations have been about the same as those countries since late 2012, which wasn't the case the 30 years prior, and here has been Japan's performance compared to those countries since then: https://finance.yahoo.com/chart/EWJ#eyJ ... QifX19fQ--. It has been Australia and Canada handily since late 2012, and has been in line with Switzerland's performance.

Now it has valuations levels lower than those other countries for the first time in probably 40+ years.
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Re: If I fear inflation, should I overweight international stocks/gold?

Post by Robot Monster »

asif408 wrote: Mon Aug 31, 2020 10:13 am
Robot Monster wrote: Mon Aug 31, 2020 9:53 am I find it not only interesting, but outright amusing that the country the market-cap international index leans into is Japan--its the top holding! If the winning formula is to pick that which has performed best over the relatively recent past, seems perhaps unfortunate that the passive index has chained itself to such an apparently losing strategy. Surely actively managed international funds would correct this, right? A no-brainer, right? Yet, the actively managed Vanguard International Core Stock Fund, just like its passive cousin, has Japan as its top country-allocation! (Even Vanguard International Growth chooses Japan as its third top country-allocation.
You do realize it was much worse in the late 1980s? IIRC, Japan ended up being more than 60% of the EAFE index in the late 1980s. It's been on a decline since then, for the obvious reason of nosebleed valuations it reached in the late 1980s. From the early 1980s to the mid 2010s Japan had valuation levels dramatically higher than the other countries you cited.

Japan's valuations have been about the same as those countries since late 2012, which wasn't the case the 30 years prior, and here has been Japan's performance compared to those countries since then: https://finance.yahoo.com/chart/EWJ#eyJ ... QifX19fQ--. It has been Australia and Canada handily since late 2012, and has been in line with Switzerland's performance.

Now it has valuations levels lower than those other countries for the first time in probably 40+ years.
Had not realized any of that. Thank you!
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Re: If I fear inflation, should I overweight international stocks/gold?

Post by asif408 »

Robot Monster wrote: Mon Aug 31, 2020 10:18 am Had not realized any of that. Thank you!
Good to know! Japan was an exception in many ways. At least now their forward looking expected returns don't look dramatically different from the rest of the developed world. The same could not be said in the 1980s, 1990s, 2000s, or early 2010s (with the exception of a year or two in the late 1990s).

This website gives a sense of how massive the bubble was in Japan and how long it lasted. Just plot Japan's CAPE ratio vs. the other countries you mentioned here: https://indices.barclays/IM/21/en/indic ... c-cape.app. It's pretty unbelievable that Japan stayed at such high valuation levels for so many years, and it was even worse in the early to mid 2000s than in 1989. The only country that had valuation levels approaching Japan was Sweden in Feb 2000, and it has done as bad as Japan since then, with a much greater fall of 80% from 2000-2002: https://finance.yahoo.com/chart/EWJ#eyJ ... I6bnVsbH0-
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Re: If I fear inflation, should I overweight international stocks/gold?

Post by asif408 »

OP,

FWIW, if you fear inflation, this a pretty good read of Bill Bernstein's view: https://www.forbes.com/sites/wadepfau/2 ... 88a81f3dac

Here are the key paragraphs:
....Inflation, though high in probability, has a lower cost for protection. It is the most relevant for retirees to worry about, but it is also the least catastrophic for a globally diversified investor. It is the easiest to protect against with international diversification, TIPS held to maturity to match spending needs, delaying Social Security, and an inflation-adjusted annuity. A globally diversified stock portfolio is most effectively protected from the deep risk of inflation, though stocks do exacerbate shallow risk. Meanwhile, unexpected inflation devastates traditional bonds.....

....Bernstein’s conclusion is that the best long-term defense against deep risk is a globally diversified equity portfolio with tilting toward value and precious metals and natural resource companies, TIPS, and potentially some gold and foreign real estate. Because of inflation, bonds become riskier than stocks over long horizons, while shallow risk makes investors with shorter time horizons more vulnerable with stocks.
One nuance that I'm not exactly clear about is that Bernstein mentions in his book that gold is actually a better hedge against deflation, which precious metals equities (i.e., gold stocks) are a better hedge against inflation. I have some difficulty wrapping my brain around that, but he did point out that in the GFC precious metals equities stocks fell a good bit while gold had positive returns. Not sure what to make of that, but here is the performance in the 2007-2009 period: https://finance.yahoo.com/chart/GDX#eyJ ... QifX19fQ--
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Re: If I fear inflation, should I overweight international stocks/gold?

Post by Robot Monster »

This from alluringreality concerning international stocks as inflation protection,

Here are a few statements by David Swensen in Unconventional Success from my last listen:
"Investors in foreign equities assume foreign exchange risk as an unavoidable part of overseas equity exposure. Realistic investors expect foreign currency translation to neither add nor subtract from investment results."
"no one really knows where currencies will go. Sensible investors avoid speculating on currencies."
"Fortunately, finance theorists conclude that some measure of foreign exchange exposure adds to portfolio diversification."
"The tenuous link between domestic inflation and dollar-denominated returns of foreign stocks renders foreign equities useless as a hedge against inflation."
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Re: If I fear inflation, should I overweight international stocks/gold?

Post by columbia »

Robot Monster wrote: Mon Aug 31, 2020 1:55 pm This from alluringreality concerning international stocks as inflation protection,

Here are a few statements by David Swensen in Unconventional Success from my last listen:
"Investors in foreign equities assume foreign exchange risk as an unavoidable part of overseas equity exposure. Realistic investors expect foreign currency translation to neither add nor subtract from investment results."
"no one really knows where currencies will go. Sensible investors avoid speculating on currencies."
"Fortunately, finance theorists conclude that some measure of foreign exchange exposure adds to portfolio diversification."
"The tenuous link between domestic inflation and dollar-denominated returns of foreign stocks renders foreign equities useless as a hedge against inflation."
viewtopic.php?p=5467672#p5467672
I've - repeatedly :) - read otherwise here.
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Re: If I fear inflation, should I overweight international stocks/gold?

Post by Blue456 »

Robot Monster wrote: Mon Aug 31, 2020 1:55 pm "The tenuous link between domestic inflation and dollar-denominated returns of foreign stocks renders foreign equities useless as a hedge against inflation."
viewtopic.php?p=5467672#p5467672
Unless that link is no longer there.
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Re: If I fear inflation, should I overweight international stocks/gold?

Post by alluringreality »

Blue456 wrote: Mon Aug 31, 2020 2:29 pm
Robot Monster wrote: Mon Aug 31, 2020 1:55 pm "The tenuous link between domestic inflation and dollar-denominated returns of foreign stocks renders foreign equities useless as a hedge against inflation."
viewtopic.php?p=5467672#p5467672
Unless that link is no longer there.
I'll agree that the entire paragraph might have been written from a context talking about the United States historically. A scenario beyond that realm, like the Deep Risk discussion mentioned previously, may presumably fall outside the original intent. When I noticed the quote I searched it and found a bit of prior discussion, which seemed reasonable enough to me for how both sides might be possible. According to Global Financial Data, emerging market stocks might have happened to do better than most during the last round of US inflation, but of course things could differ in the future.
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