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Do Stocks Provide a Sufficient Inflation Hedge?
From The Inoculated Investor Blog:
The following is my relatively brief commentary regarding what asset classes are likely to perform best if the US economy experiences a high inflation environment. While the past is certainly not a predictor of the future, it can be informative to study periods such as the 1970s in an attempt to anticipate how to position an investment portfolio. (Sorry for using Scribd but the formatting was not coming out properly.)
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Tell that to the countless millions, who lost ALL, in the Markets, not once, maybe even twice.
And the one's piling in, for a repeat....................some folks never learn.
Also, unfortunately, there is only ONE Oracle of Omaha, and I ain't him.
Will Rogers once said,
" I am more concerned with the return of my money, than the return on my money". Of course Will was wealthy.....................
How many can say,they are back in a PLUS position after losing their gains once or twice after 20-35yrs of being in the markets?.
I am sure a lot...................I just do not know any.
Hell to try and turn around those losses, when your 50yrs old, or more.............time waits for NO man.
Gold rises before and in the beginning of inflation, its a cause not a hedge, its all psychological, people jump into gold because they think there will be inflation and feel that gold is a good store of value....sound familiar, gold jumps with no inflation...why? Inflation expected ahead (obviously this isn't the only reason, but there is long-term historical correlation to show this)
So Buffett just bought a railroad? A coal hauling 19th century dinosaur hauling ancient carbon bits? This runs against what he should have learned in the first depression, when real economic activity didn't recover until WWII. If anything, you wanted to invest in conspicious consumption, not Fred and Ginger dancing, (the golden age in Hollywood) but airplane rides into space. The other thing I want to invest in is sports franchises, (the only business GWB, who owned the Texas Rangers, ever made money running, thanks to the new stadium the city bankrolled)
So there must be some REITS which track this stuff. It's like the San Diego Chargers, owned by a real estate family, the Spanos. The city is broke, but they are pushing for corporate welfare to build them a new downtown stadium, which will raise the value of that franchise considerably. And they will get it, because there are rich, smart and powerful, and going to football game is an act of conspicious consumption, especially for those in the sky boxes. So the lesson to all this is correct, you want a business plan which sucks up to the government trough, hire some high profiles attorneys (Chargers hired Fabriani, former Clinton admin) and use your power and influence to squeeze blood from the stone cold broke electorate, usually by a referendum on a sales tax, after you put together a winning season of course. (You have to salt the mine a bit as they say, after you win the stadium initiative you can cut payrolls and let the team malinger endlessly)
There are other ideas, but consumption, access to government funds, and core investors with plenty of money to play with, ready to wield their power, for the good of their fanbase, or service oriented customer. (buying stocks on book value, in a service economy, during a recession, seems a bit suicidal to me, but the concept is sound with a few caveats)
grateful,
Ever think Buffet might have bought a RR, to dump devalued dollars?.
That's a BIG RR.................and knowing Buffet, he has an inside track on what's coming in the future.
I do not know of a less expensive way to haul a lot of freight, than by rail..........
With the greenies taking over, fuel costs are going to be the #1 priority, and how much can be hauled on a cost/fuel/tonnage/ usage ratio.............compared with any other means available?.
Just a thought............
Europe,Japan, and China, have some hellacious railroads..........and fast.
Maybe the SEER of Omaha, is looking ahead, he seems to have an uncanny knack at it.
so, in summary--buy low sell high? applies to anything.
I would be very wary of using the experiences of the 1970s to guide my investment thinking in the 2010s on inflation or any other issue...and I was actually an investing adult then.
Today's economic crisis is driven by massive excesses in the financial system as all ZH readers well know. The recession and inflation of the ugly '70s was driven two major cutoffs in oil supplies from the Middle East as well as fear of another, more dangerous, war there.
Indeed, oil price escalation was probably the principal driver of inflation in the period. Consumption of other goods plummeted as consumers filled their gas guzzler fuel tanks.
Fear of of major war and economic dislocation was another driver. The 1973 Arab-Israeli War (& the first oil embargo) and the 1979 Iranian revolution (& loss of Iranian oil production) fueled massive speculation in gold (actually much more than the current run-up has so far).
These types of forces are not as applicable today. NTL, I may need to break out my "WIN" (Whip Inflation Now) button from 1974. Good luck with that!
Anon,
What would you say, if when some of us were sitting in lines, and only getting to refuel on odd / even days by license plates numbers, that it was caused by your Gv't?.
Would you believe it was all a Pre-Planned event?.
Would you believe that EVERY hole, in the USA, capable of storage was full to the brim with crude?.
That tankers were ( like today ), offshore, loaded to brim, because there was no more STORAGE reservoirs?.
Well, it was.......................a pre-planned event.
A test, to see HOW the American people would react...............
Had I known that at the TIME, or any others, there would have been Hell to pay.
Luckily, I did not find out until about ten years later.
I have looked into this before because Buffett's assertions about stocks as an inflation hedge didn't square with what I recall about the high inflation period from the late 1960's to the early 1980's. I came across this:
http://home.znet.com/schester/financial_advice/historical_return.html
1966-82
Annual inflation: 6.9%
Stocks returned 8.3% per year with a standard deviation of 17.4%
T-Bills returned 7.1% per year with a standard deviation of 2.9%
30 year government bonds returned 5.0% per year with a standard deviation of 11.1%
He doesn't have the data on gold over the 1966-82 period. I suspect Greenwald's comments on gold as an inflation hedge are not really his own, but are those of Jean-Marie Eveillard who ran the First Eagle funds for a long time before Greenwald had any affiliation with them.
On a risk versus return basis, particularly for somebody in retirement or close to it who had to make periodic withdrawals, I’d say t-bills win the 1966-82 comparison versus stocks hands down.
Thanks GS. The question in my mind is whether T-Bills will be fundamentally sound and with a reliable ROI, when the poop hits the fan in an escalating fashion.
Have we ever tested this, historically? What was the outcome?
The reason he doesn't have the data on gold from 1966 is because private gold ownership was illegal until 1974. It wasn't until Tricky Dick closed the gold window, declaring force majeure, ending the partially gold backed USD regime established through the Bretton Woods agreement, that gold could be publicly traded. Previous to that time Joe Public wasn't allowed to deal in the yellow metal and there was a set exchange value, in gold, for a USD. We the people couldn't cash-in our paper currency for gold though. Only foreign central banks could exchange USDs for gold before this time. Interesting though, it was after Nixon slammed the gold window that inflation in the US really reached critical levels. Our currency became truly fiat August 15, 1971. Then it was in 1974 (I pretty sure) that gold became publicly tradable and ownable.
I'm not a gold bug so much as an amatuer historian.
I didn't think about the issues you raise, but there were annual returns shown for gold from 1960-80 and 1960-89.
Betcha IRS is setting their cross-hair on any possible gain from the hedge.
things like this?
http://yfrog.com/3tjuniorminersj