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Inflation

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GrahamPlatt
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Re: Inflation

#428861

Postby GrahamPlatt » July 19th, 2021, 6:38 pm

Yeah, those HYPers, switching positions once a decade.

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Re: Inflation

#428866

Postby 1nvest » July 19th, 2021, 6:48 pm

The 19th century had broadly zero inflation - periods of both inflation and deflation that cancelled out overall. Money was gold, gold was finite.

In the 1930's that convertibility of both Pounds (1931) and US$ (1933) of money/gold ended. Since then there's been predominately just inflation. The Pound has declined relative to the US$, the US$ has declined relative to gold. A UK investor who opted to hold a third US$ hard currency stuffed under a mattress alongside two-thirds in gold, yearly rebalanced back to 33/67 weightings ... would have seen that 2020 stash maintain its 1930's purchase power.

2020 US$ buys just 1.5% of the gold it bought in the 1930's.
2020 £ buys just 28% of the US$ it bought in the 1930's.
2020 £ buys just 0.4% of the gold it bought in the 1930's

Inflation is to large extent the reflection of devaluation of the domestic currency. When a legal counterfeiter can print/spend money they benefit from such spending, at the expense of all other notes in circulation being devalued a little. A form of micro-taxation, that if scaled up and compounded over time can lead to substantial amounts of 'taxation'.

It's not as easy as stuffing gold/currencies under a mattress however, as there's considerable volatility along the way, over some extended periods individual currencies can appreciate relative to others and to gold. 1980 for instance and it took just a ounce of gold to buy into a Dow stock index fund, in 1999 it took 40 ounces of gold. A reasonable approach might be to hold equal amounts of £, $ and gold currencies and then select where to invest those cash amounts, perhaps stocks and bonds. Easiest and more tax efficient perhaps to hold £ bonds, $ stocks. Here's a june 2021 review of such a portfolio https://lemonfool.co.uk/viewtopic.php?f=56&t=30382 a portfolio that if backtested to the 1930's has comfortably supported a 3% SWR to near-as be a PWR (perpetual withdrawal rate). Domestic £, primary reserve US$ and global currency (gold) currency diversification; Stocks, bonds and commodity asset diversification.

GrahamPlatt
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Re: Inflation

#428877

Postby GrahamPlatt » July 19th, 2021, 7:59 pm

1nvest, you have to understand that our time horizons are not 1930-2021. They are more like (or less than) 1980-1999.

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Re: Inflation

#428881

Postby kempiejon » July 19th, 2021, 8:02 pm

I'm going to be more interested in 2020-2040. Crack that and we're golden.

odysseus2000
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Re: Inflation

#428886

Postby odysseus2000 » July 19th, 2021, 8:15 pm

GrahamPlatt wrote:Yeah, those HYPers, switching positions once a decade.


Ha Ha, Yes, but HYPers are a narrow select group and do not reflect the majority of market activity.

If 2020 to 2040 is your time scale that is fine, but my time scale tends to be several days and judging by what I see of outfits like Ark who do publish their trading logs and who focus on trading around long term positions, I am far from excessive.

Regards,

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Re: Inflation

#428892

Postby 1nvest » July 19th, 2021, 8:53 pm

scrumpyjack wrote:If I thought inflation in the UK was to return in a very substantial and long lasting way, which has been the norm since WW2, I think I would move it to another currency, probably Swiss Francs. I think that is more secure than the dollar which has also had periods of high inflation.

I think it is quite probable that we will have a return to high inflation, much the same whichever government we have.

These are charts of a range of currencies relative to gold

Image

Rebased to a 1980 start date ...

Image

GrahamPlatt
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Re: Inflation

#428907

Postby GrahamPlatt » July 19th, 2021, 9:31 pm

1nvest wrote:These are charts of a range of currencies relative to gold

Image

Rebased to a 1980 start date ...

Image



“1980 for instance and it took just a ounce of gold to buy into a Dow stock index fund, in 1999 it took 40 ounces of gold.”

NotSure
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Re: Inflation

#428916

Postby NotSure » July 19th, 2021, 9:55 pm

scrumpyjack wrote:
GrahamPlatt wrote:
scrumpyjack wrote:I'm not sure about 'all this selling going into cash' because on the stockmarket in principle there are 2 sides to each transaction - a buyer and a seller, so for every seller having more cash, there's a buyer with less cash. It is all cash neutral overall. Obviously there are complications to that but not enough to substantially change the notion that it is all cash neutral.


If the overall value of 'the market' falls, it's not because of buying and selling per se - it's because equities have been re-priced downwards; there is less overall value. Same with the housing market but in the opposite direction; it's on the rise despite there being fewer sellers around.


For equities that is of course quite true, and overall no cash has been taken out or put in.

For the housing market, as much of house price purchase is usually financed by mortgages, there can be a considerable amount of cash moving into or out of the market. For example most older people selling, or on death, will have paid off their mortgages whilst the younger buyers will usually have borrowed the money to buy with.


What about when a leveraged equity investor/trader sells to an unleveraged one, or vice versa? Surely cash can get sucked in and out of equities via leverage? And as I understand it (i.e. not at all) the leveraged tend to trade more frequently that those that are not.

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Re: Inflation

#428927

Postby odysseus2000 » July 19th, 2021, 10:36 pm

NotSure
What about when a leveraged equity investor/trader sells to an unleveraged one, or vice versa? Surely cash can get sucked in and out of equities via leverage? And as I understand it (i.e. not at all) the leveraged tend to trade more frequently that those that are not.


The concept that no net money changes hands is often stated for common stock.

E.g. X sells 1 share at 100, y buys 1 share at 100, no change in money.

X decides to do no more and has 100.

Y now decides he doesn't like the market and sells, but the best price available is 80 from Z

Y now has 100-20 = 80

Z now has 80

If more investors don't like the market, Z may find that U will only pay 60 but he sells.

Z now has 80-20 = 60

At every point the buyer and seller are matched but in a bear market the holders of equity can not recover the cash they paid because shares have fallen in price. In the above example x ends with 100, Y has 80, Z has 60, U has 60. If the share has a dividend this would also have to be accounted for.

If one brings in derivatives such as options the whole thing get more complicated.

E.g. making up figures and ignoring that options generally control 100 shares etc etc.
X doesn't like the market, he keeps his share but buys a put for 1, giving him the right to sell a share at 100.

By the time U is buying, the option might by worth 40, and X then sells it, so that he ends up with his share that is valued at 60 plus the put profit which is 40, or a total of 100 less dealing costs etc.

In this massively simplified example X would have been slightly better to sell, but nonetheless ends up with 100 before costs and keeps the share which may have a dividend yield that more than covers the option cost in which case the options route is better.

Regards,

1nvest
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Re: Inflation

#428934

Postby 1nvest » July 19th, 2021, 11:13 pm

GrahamPlatt wrote:
1nvest wrote:These are charts of a range of currencies relative to gold

Image

Rebased to a 1980 start date ...

Image



“1980 for instance and it took just a ounce of gold to buy into a Dow stock index fund, in 1999 it took 40 ounces of gold.”

... so holding 50/50 of gold/stocks looks a reasonable choice. Since 1972 to recent for US data and 50/50 stock/gold 10.5% annualised, versus 10.8% for all-stock. Where 50/50 had lower volatility/better risk adjusted reward (Sharpe).

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Re: Inflation

#428970

Postby dealtn » July 20th, 2021, 8:25 am

odysseus2000 wrote:
NotSure
What about when a leveraged equity investor/trader sells to an unleveraged one, or vice versa? Surely cash can get sucked in and out of equities via leverage? And as I understand it (i.e. not at all) the leveraged tend to trade more frequently that those that are not.


The concept that no net money changes hands is often stated for common stock.

E.g. X sells 1 share at 100, y buys 1 share at 100, no change in money.

X decides to do no more and has 100.

Y now decides he doesn't like the market and sells, but the best price available is 80 from Z

Y now has 100-20 = 80

Z now has 80

If more investors don't like the market, Z may find that U will only pay 60 but he sells.

Z now has 80-20 = 60

At every point the buyer and seller are matched but in a bear market the holders of equity can not recover the cash they paid because shares have fallen in price. In the above example x ends with 100, Y has 80, Z has 60, U has 60. If the share has a dividend this would also have to be accounted for.



Yes. The system starts with 240, and ends with 240. All that has happened is a relative change in prices between your 2 assets, cash and equity.

Yet there is often a claim that equity prices go up, or down, due to money entering or leaving the market. This isn't true. The relative price changes are driven by other factors, either information, or the marginal buyer (seller) having a weaker position (or stamina) than the marginal seller (buyer).

GoSeigen
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Re: Inflation

#429001

Postby GoSeigen » July 20th, 2021, 10:56 am

NotSure wrote:What about when a leveraged equity investor/trader sells to an unleveraged one, or vice versa? Surely cash can get sucked in and out of equities via leverage? And as I understand it (i.e. not at all) the leveraged tend to trade more frequently that those that are not.


I'm getting a sense of deja vu! Didn't we have this discussion just a week or two ago?

You're confusing what happens to an individual person with what happens in aggregate. A market is always at least TWO people, not one. So if the one person is buying the other is selling and the aggregate numbers tell a different story to the case of each individual. See:

https://en.wikipedia.org/wiki/Fallacy_of_composition

GS

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Re: Inflation

#429106

Postby NotSure » July 20th, 2021, 4:22 pm

GoSeigen wrote:
NotSure wrote:What about when a leveraged equity investor/trader sells to an unleveraged one, or vice versa? Surely cash can get sucked in and out of equities via leverage? And as I understand it (i.e. not at all) the leveraged tend to trade more frequently that those that are not.


I'm getting a sense of deja vu! Didn't we have this discussion just a week or two ago?

You're confusing what happens to an individual person with what happens in aggregate. A market is always at least TWO people, not one. So if the one person is buying the other is selling and the aggregate numbers tell a different story to the case of each individual. See:

https://en.wikipedia.org/wiki/Fallacy_of_composition

GS


A related discussion - about how asset prices had nothing to do with supply and demand (as those words are commonly used when referring to equities - supply: sellers looking for a buyer, demand: a buyer looking for shares/bond to acquire).

Your statement made quite an impression on me, but when trying to research further, all I could find was endless websites and individuals explaining how price was influenced by a number of factors (fundamental, technical etc.), but ultimately down to supply and demand.

So no, I still haven't got it but I do continue to try!

Maybe not the best source, but this is TLF: https://www.fool.com/investing/how-to-invest/stocks/why-stocks-go-up-and-down/

If you could point me at a better source going into more detail about why supply and demand are irrelevant, I would genuinely be grateful.

This paper at least presents some arguments either way, but doesn't draw any compelling conclusions. Is not the usual complex mixture of both?

...There two views of predicting future share price. Technical analysts believe that only demand and supply drive the stock price since all other factors (e.g. economic, political etc.) are discounted and reflected in market prices. Fundamental analyst determines the intrinsic values of the company and compares it with the current market price...


https://www.arabianjbmr.com/pdfs/OM_VOL_5_(3)/5.pdf

Either way - apologies, not very relevant to inflation....

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Re: Inflation

#429143

Postby odysseus2000 » July 20th, 2021, 5:39 pm

NotSure
Either way - apologies, not very relevant to inflation....


Actually it is relevant.

To get inflation we have too much money chasing too few goods. This is a direct analogue of a bull market.

Manufacturer X needs widget W to do a job.

Suddenly he sees the price of widget W begin to rise and the delivery times rise.

He thinks this is a bubble that will soon pop, but the price keeps rising and delivery lengthening because other manufactures also need W.

He holds out, expecting a correction, but it doesn't come and his need for W has not decreased. He orders W and immediately raises all his prices to cover the cost of W.

The retailers who will sell his product have to raise prices to cover the new cost of goods supplies by X and the folk who buy the products also raise prices.

We get into a vicious inflationary spiral.

But then manufacturer C, sees the price of W and decides he can make an equivalent for a lot less.

C advertises his new product and the price of W falls.

This is the sort of inflation killing trade that has happened since China became a super power.

However, what we are seeing now is more like 70's inflation when oil went up and there was no counter to Opec to bring prices down.

Once oil shot up every thing followed. The farmer who uses diesel to plant and harvest his potato, put up prices, the pie shop that uses potato in its pies, put up prices etc etc.

Now we are seeing price rises of staples like wood, copper, food etc and the inflation bulls argue there are no new suppliers while the inflation bears argue this is all covid related and once full work forces return there will be plenty and we will return to deflation or a bear market with too many goods chasing too little money.

In our first example everyone who needed W has bought it and there are other cheaper suppliers, so W is not selling and the price has to be cut significantly to generate any interest and with W costing less other competition breaks out and prices fall across the board.

I have no clue what will happen here as I can easily make either case, but if I had to choose I would argue that the inflation case is the harder to justify of the two, especially as we have not had serious inflation since the 70's, but I don't know for certain.

Regards,

GrahamPlatt
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Re: Inflation

#429228

Postby GrahamPlatt » July 21st, 2021, 8:42 am

What I fail to “get” about inflationary relationships is why it is that equity prices tend to fall with rising inflation.
I’d class shares with all other tangible goods and expect them to rise alongside the rest.

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Re: Inflation

#429231

Postby TUK020 » July 21st, 2021, 8:49 am

GrahamPlatt wrote:What I fail to “get” about inflationary relationships is why it is that equity prices tend to fall with rising inflation.
I’d class shares with all other tangible goods and expect them to rise alongside the rest.

Share price can be considered the discounted cash flow of future earnings.
Inflation raises the discount rate.

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Re: Inflation

#429242

Postby odysseus2000 » July 21st, 2021, 9:39 am

Graham Platt

What I fail to “get” about inflationary relationships is why it is that equity prices tend to fall with rising inflation.
I’d class shares with all other tangible goods and expect them to rise alongside the rest.


A lot depends on where you are in the cycle.

If you are near the start of an inflationary surge then equity prices will tend to rise with the inflation as manufacturers will increase prices faster than the inflation rate to be sure of a profit.

Later on as the politicians get serious about fighting inflation and jack up interest rates then there is less money to buy stuff and prices fall so that company earnings are less and equity prices fall.

Regards,

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Re: Inflation

#429251

Postby GoSeigen » July 21st, 2021, 10:06 am

NotSure wrote:
GoSeigen wrote:
NotSure wrote:What about when a leveraged equity investor/trader sells to an unleveraged one, or vice versa? Surely cash can get sucked in and out of equities via leverage? And as I understand it (i.e. not at all) the leveraged tend to trade more frequently that those that are not.


I'm getting a sense of deja vu! Didn't we have this discussion just a week or two ago?

You're confusing what happens to an individual person with what happens in aggregate. A market is always at least TWO people, not one. So if the one person is buying the other is selling and the aggregate numbers tell a different story to the case of each individual. See:

https://en.wikipedia.org/wiki/Fallacy_of_composition

GS


A related discussion - about how asset prices had nothing to do with supply and demand (as those words are commonly used when referring to equities - supply: sellers looking for a buyer, demand: a buyer looking for shares/bond to acquire).

Your statement made quite an impression on me, but when trying to research further, all I could find was endless websites and individuals explaining how price was influenced by a number of factors (fundamental, technical etc.), but ultimately down to supply and demand.

Price ultimately is down to supply and demand but with negotiable securities it's an unhelpful concept because I doubt the price elasticity to demand is even measurable, let alone constant. Sometimes the apparent demand will increase as the security price rises, like a veblen good, sometimes the opposite. I say apparent demand because one is merely inferring or surmising demand from other factors like technical price levels etc.

I find it much much more useful to think about required yield because this is absolutely concrete, is based soundly in bond maths, and can be easily understood in relation to aggregate asset allocation share. So if the price of a security goes up I simply infer that the required yield has fallen, investors in aggregate want more of the asset in their portfolio than before relative to their other assets. It's very very easy to understand.

So no, I still haven't got it but I do continue to try!

Maybe not the best source, but this is TLF: https://www.fool.com/investing/how-to-invest/stocks/why-stocks-go-up-and-down/

The example given in the first part is fine as far as it goes but is quite simplistic and hides much of what actually happens. The problem with the concept presented is that sometimes the price might move after 500 transactions, but on other occasions it may not move despite millions of transactions and in yet other cases it may move violently in either direction on 0 transactions! Yes, you could say each of them is due to "demand" and "supply" but how do you actually quantify that demand and supply? I can't see there is any reliable way after decades of trading. Some individuals try to do this with L2 trading or other tea leaves but I challenge you to find me one who has made any money doing so. On the other hand I abandoned this way of thinking when still an investing beginner and am satisfied with my portfolio returns of 14% CAGR over 20 years!
If you could point me at a better source going into more detail about why supply and demand are irrelevant, I would genuinely be grateful.

This is my own conclusion, so I cannot recommend a book, but John Hussman has much the same though patterns as me and is an excellent read: https://www.hussmanfunds.com/comment/mc210614/
Perhaps irrelevant isn't the word for trying to link supply and demand to stock prices: more like unhelpful, pointless and distracting.

This paper at least presents some arguments either way, but doesn't draw any compelling conclusions. Is not the usual complex mixture of both?

...There two views of predicting future share price. Technical analysts believe that only demand and supply drive the stock price since all other factors (e.g. economic, political etc.) are discounted and reflected in market prices. Fundamental analyst determines the intrinsic values of the company and compares it with the current market price...


https://www.arabianjbmr.com/pdfs/OM_VOL_5_(3)/5.pdf

Either way - apologies, not very relevant to inflation....


Ah, now if it comes to predicting future prices I'm confident supply and demand is futile. As a rear-view mirror exercise it may well have some entertainment value. I believe I can achieve better by saying "the market believes this security is worth a yield of x; I believe it is worth a yield of y<x; therefore I think there will be some demand until the market price moves the yield from x to y. How quickly that will happen is another matter entirely." See my recent posts about MBSR and MBSP for examples of that thinking.

GS

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Re: Inflation

#429252

Postby GoSeigen » July 21st, 2021, 10:07 am

GrahamPlatt wrote:What I fail to “get” about inflationary relationships is why it is that equity prices tend to fall with rising inflation.


Is this even true? How do you know?

GS

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Re: Inflation

#429310

Postby 1nvest » July 21st, 2021, 1:54 pm

GoSeigen wrote:
GrahamPlatt wrote:What I fail to “get” about inflationary relationships is why it is that equity prices tend to fall with rising inflation.


Is this even true? How do you know?

GS

If the nominal price remains unchanged then the price declines in real terms with rising/higher inflation :)


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