Revisiting 1969 – 1984 and the Impact of Inflation on Equities
Introduction: A Brief Contemplation of Inflation Kailash does not make macroeconomic forecasts.
This newsletter seeks to prove that our prior paper, The Case for Common Sense, represents good investing basics in any environment but also survives the lessons of the Great Inflation. Despite 10-Year Treasury yields having nearly tripled since their lows in August last year, real yields are still negligible, and inflation is topical. Summarily, one could suggest the following are signs that inflation is possible and hence another powerful reason to buy quality at reasonable prices:
- Charlie Munger: “…we’re in very uncharted waters. Nobody has gotten by with the kind of money printing we are doing now, for a very extended period without some trouble. And, I think we are very near the edge of playing with fire. [The amount of money printing] is astounding. What kind of lunatic would loan money to a European government for 100 years at less than 1%”
- Social Stability & Math: Thoughtful work by Collaborative Fund shows that the incredible financial health of the average consumer masks a wealth and income disparity that, similar to LBJ’s policies in the 1960s, could accelerate government largess to stave off social instability while excellent work by Advocate Capital shows a strong predictive link between GDP growth and Treasury Yields
- The Fed Said So: TD Ameritrade recently noted that the Fed’s 2% average inflation guidance is effectively an explicit promise to overshoot – an assessment that makes a lot of sense to us
- The Market: With Tesla worth nearly all the energy stocks in the S&P 500 and investors applying record valuations to firms that incinerate cash, the market seems very “short” inflation
- George A. Roche: The legendary helmsman of T. Rowe, who started on the New Era fund in 1969 when it was launched as an inflation hedge, instructed investors to look to the 1970s to gauge stock performance during inflationary periods….and so we did
The chart below is stunning in its simplicity. In periods of persistent inflation, investors were well served to own stocks that provided what they needed and avoid investing in companies that sell items they wanted.
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