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another post on inflation fears

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
spasmodicus
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Re: another post on inflation fears

#394718

Postby spasmodicus » March 11th, 2021, 6:50 pm

1nvest wrote:A simple model is to assume a two thirds take-home out of a £24K average wage (16K net) has on average half available to be spent on a mortgage. At 2% rates and 8K available that opens up a interest only repayment mortgage of £400K home value in the average case.

If interest rates rise to 4% the same 8K of available funds buys a £200K mortgage/home value. i.e. home values, stocks and long dated bonds might all halve in price if/when interest rates rise from 2% to 4%..........

........A retiree living in a 500K home with another 500K invested in a stock portfolio that is generating 4% dividends, 20K/year, may feel themselves to be a comfortable millionaire. But if/when mortgage interest rates rise to 4% from 2% levels and both their stocks and home values had halved, even though the portfolio may be paying 6% dividend, 250K home value, 250K stock value paying 6% is down 5K on income production, a 25% haircut ... perhaps at a time when inflation is also modest (so even lower in real terms). In contrast another who lived in a 250K home, had 250K in stock and 500K in cash might see their net wealth having dropped from 1M down to 750K. We're in a era where very low interest rates is having many with very high levels of cash reserves and where even accepting a small regular loss in real terms on that cash is seen as being acceptable given the potentially significant risk in other assets as/when interest rates/inflation rises.



Hi 1nvest,
I simply don't buy the idea that house prices would halve (in the UK) if interest rates went up to a meagre 4%. Or do you mean in real terms over a long period, or what?

a) Boris and his chums and the Daily Mail simply wouldn't allow it.
b) My own experience in the mid seventies when I bought a house for 17k was the absolute opposite. The floating interest rate on my mortgage peaked soon after I bought the house at over 14%. I sold the house in 1980 for 51k. I never bothered to work out whether the house increased in value in real terms, but it certainly seemed like it at the time.
c) Unlike stocks bonds or cash, you can live in your house and you probably wouldn't sell it until your 500k (maybe diminished to 250k) ran out.

Or am I missing something?

But I agree with the bit about having high levels of cash reserves.
regards S

1nvest
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Re: another post on inflation fears

#394745

Postby 1nvest » March 11th, 2021, 8:32 pm

spasmodicus wrote:I simply don't buy the idea that house prices would halve (in the UK) if interest rates went up to a meagre 4%. Or do you mean in real terms over a long period, or what?

a) Boris and his chums and the Daily Mail simply wouldn't allow it.

Tend to agree, I suspect we're more likely to see inflation spike whilst interest rates remain suppressed, BoE printing enough money to buy (or sell) Gilts to "yield curve control" that props up house prices. Wider negative real yields whilst keeping house prices up (interest rates low) would also deflate (inflate away) the UK debt level in real terms.

In which case gold would tend to do well as when other assets look set to yield a negative real return then investors tend to buy gold (somewhat like a undated zero coupon inflation bond).

I further suspect that rather than the 70's, we'll see inflation at moderate levels (mild negative real yields) interspaced with the odd years of spiking inflation that falls back down again, -2% real yields for a few years, -5% one year as inflation spikes from perhaps 1% to 4% for that year, before falling back down to 1% inflation again type progression.

50 Stock 25 in each of gold cash can be defensive For instance 1972 and a couple years later and stocks had near halved in real terms

Again starting 2000 was near as equally as bad in real terms for all stock. 50/25/25 stock/gold/cash was also down, to around 0.77 versus 0.54 for all stock

Over full cycles, 1972 to recent the differences become more subjective as to exactly when you select the start/end dates as all stock is the more volatile and zigzags around more. In 1980 the Dow/Gold was at levels where a little over a ounce of gold bought the Dow (suggestive that either gold was expensive/stocks were cheap or a combination of the two). In 1999 the ratio was up at over 40 ounces of gold to buy the Dow (stocks expensive/gold cheap). Much of overall longer term rewards is subject to relative valuations at the start/end dates. Interest rates/yields can also be a indicator of relative valuations.

Based on the S&P500/gold recent level and current interest rate level it looks like stocks are moderately expensive, gold fair/mildly inexpensive, so perhaps starting today rather than 50/25/25 stock/gold/cash maybe 40/30/30 might be more appropriate. But that's just speculation, more often you're better served by just picking a appropriate asset allocation weightings and sticking with that. Markets these days aren't free-floating, but are quite tightly controlled - as they say, "don't fight the Fed".

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Re: another post on inflation fears

#394778

Postby 1nvest » March 11th, 2021, 11:30 pm

Looking at some figures over on https://tradingeconomics.com/

Recent 2020 projections out to 2022 has ...

UK GDP dips -13% before rebounding +21% (likely mostly down to Covid?)
Inflation rising from 0.7% to 2%
Interest rates remaining the same (0.1%)
Real yields changing from -0.6% to -1.9%
Both UK and US stock markets down -11% in their respective currencies
UK holder of US$ gaining +4% (so reducing US stock losses down to -7% in Pound terms i.e. less of a decline).
House prices falling -2%
Increasing negative real yield is typically good for gold and index linked gilts; Any gold gains would be further enhanced by the 4% relative weakening of the Pound vs US$.

So (my) guesstimates ...

UK stock : -11% + 3% dividend = -8%
US stock : -7% + 2% dividend = -5% in £ terms
House : -2%
Cash : 0%
Index linked gilts : +8%
Gold : double digit gain

... Usual caveat of predictions more often turn out to be wrong. Current prices are levelled to current future predictions and the further actuals deviate from predicted levels the larger the potential of unexpected gain/loss.

-4% projected lower house prices in real terms when inflation has (projected) risen from 0.7% to 2% is perhaps partially reflective of the ending of the stamp duty holiday.


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