How Would Investors React If We Finally Get Some Inflation?

I guess it's a 'where to from here' type of post...

How Would Investors React If We Finally Get Some Inflation? - A Wealth of Common Sense

In World War I and World War II there were a number of ways in which you could show your patriotism to support the United States. Some people volunteered to put their life on the line for their fellow citizens. Others stayed back to ensure there were enough supplies for the war effort by working in factories.

The government also played up the patriotic angle through financial means by issuing war bonds to pay for it.

In World War I, $2 billion in Liberty Bonds were sold to the investing public.

In World War II, those numbers shot up dramatically, as 85 million Americans snatched up more than $185 billion in bonds to finance the war.

The current situation is not exactly a war but we have similar financial needs. Instead of asking for the public to do their civic duty by buying bonds, the government is sending people money and the Fed is the one buying all the bonds.

Jeremy Siegel discussed these differences with Barry Ritholtz on a recent Masters in Business in terms of what it might mean for the economy:

With this liquidity in the economy, as we say, I expect moderate inflation, not — I’m not talking about hyperinflation. And so, I’m nowhere near that. I expect inflation to move up in the next year to 2, 3, 4 percent, 5 percent and maybe run again in 2022 the same way.

So, cumulatively, I expect inflation may be to go up — the price level, consumer price level go up 10, 12 percent over the next few years, maybe 15. Now, don’t forget, we had almost 15 percent inflation in one year back in the terrible years, of the late ’70s.

So, again, this is what I call moderate inflation. I expect bond yields to rise from the current half percent to one, one and a half, two, two and a half, three. They’re still great hedge, short-term hedge. Three, three and a half on treasuries, maybe four.

If we have 15 percent inflation, you wipe out $3 trillion.

So, basically, that’s how you paid for it. Inflation is another way to tax people. It’s a tax on the bondholders.

Siegel lays out an interesting scenario here for the next few years. So much money has been sent out to households (with potentially more to come) we could actually see a spending boom when the virus subsides. That spending boom could lead to a big jump in the inflation rate which would effectively wipe out a substantial portion of the debt we’ve taken on this year.

Siegel estimates inflation running at 15% would basically wipe out $3 trillion of debt, which would mean bondholders who have accepted such low yields would be the ones subsidizing this debt. Ipso facto, the Fed is going to pay for it.

He’s also not calling for hyperinflation but a path back to normalcy after an initial step-up in the price level.

Continues on link..........

 

I am old enough to remember high inflation

as a retiree it’s the enemy, but as a property investor it will eat away at the mortgages real quick.

interesting perspective

 

I just can't envisage where the inflation will come from. For years Australia hasn't even been able to meet its inflation targets of 2-3%. With record low interest rates the RBA is also well-positioned to curb inflation through monetary policy. Personally I don't mind if we have high inflation as long as it comes with correspondingly high wage growth!

 

It's been anaemic across much of the OECD for years now leaving economists somewhat perplexed as to why inflation stayed so stubbornly low even in the face of healthy and/or rising employment figures. Hard to see where it would come from and just how many economists are forecasting anything north of 2% in Australia.

And less risky places for insurers, super funds and savers to finally park some of their cash! One can only dream.

 

RBA would have to walk away from its inflation target

 

Would inflation come with rises the cash rate? if not, we would effectively have a decrease in real interest rates - similar effect as further rate cuts. Awesome for debt holders.

 

Inflation above 3% will potentially increase interest rates.

While the demand side will keep inflation low, inflation could happen if there are supply issues e.g. food shortage, crude oil spike, toilet paper hoarding, the works.

 

Be careful with what you wish for. Higher inflation quickly becomes higher interest rates. They depress the ability of people to borrow leading to lower property prices and less CG. Rent increases disappear into the jaws of the lending institutions, other costs rise "in line with inflation" or a bit more.

Been there - seen it happen.

 

There has been heaps of inflation in the past 10 years it's just that the central banks ignore it. You can find it in asset prices (either property or stocks). You just have to look at almost record breaking stock values while the world drives into a massive recession.

Maybe we need an unconventional way of measuring inflation to match our unconventional monetary policies.