7.01.2021

Stocks for the long-run inflation!

 Jared Dillian at Mauldin Economics:

I get this a lot. People say, “We are experiencing inflation, so stocks should go down! Because that’s what happened in the 1970s.”

This isn’t the 1970s. This is a different sort of inflation.

What we are experiencing now is a monetary inflation, compounded by big government interventions in the labor market. This is not stagflation.

In fact, the period of stagflation that we experienced in the 1970s was an anomaly, as far as great inflations go, and isn’t likely to be repeated.

If you’ve been shorting stocks in advance of CPI numbers, and you’re not broke already, you will be soon. Inflation benefits stocks. Stocks are inflation pass-thru vehicles, though most people realize that by now.

In fact, stocks have been a better inflation hedge (so far) than gold, which has seen a lot of outflows to cryptocurrencies. This is why I’ve been increasing my allocation to equities and real estate and decreasing it elsewhere.
This is something I've felt intuitively, but haven't really had a good answer when people have said stocks historically aren't good inflation hedges. It's all about the 70's being the only inflation in recent memory!
 
As for the other period I've been comparing the current fiscal situation to, the years after WWII, it's true that during the worst inflation year, 1946, stocks were down. But over the full inflation cycle, from 1946 through 1951, stocks did quite well. The S&P returned a nominal 13% annually including dividends, well outpacing inflation.

I like Dillian's description of stocks as "inflation pass-thru vehicles." This is what I was getting at back in 2008:
Do you buy the Treasury bond that will be destroyed with inflation, or do you buy the chip stock whose products, assets, and dividends will rise with inflation?
That semiconductor stock is up more than 300% since then. Its dividend has increased 148%, and your yield on cost from 2008 would now be 6.5%. Meanwhile bonds as represented by the Vanguard Total Bond Market ETF ($BND), are up less than 13% in price and yield less than 2%.

1 comment:

K T Cat said...

Stocks are inflation pass-thru vehicles - what a great turn of phrase!

Milestones

I talk a lot about inflation. But today was the first time in my life I actually used a dollar bill as toilet paper.