What's the problem with inflation?

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prudentelo
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Re: What's the problem with inflation?

Post by prudentelo »

zibigi says on other thread he has a 1.25% SWR but still went back to work.

One way to discount your portfolio is to have more money.

Another way is to be psychologically indifferent to outcomes. Few people stay at college to wait for the job with <1% chance of layoff for the next 60 years, calculated with monte carlo as against historical career outcomes.

Some times I wonder if ERE is not kind of "self therapy

zbigi
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Re: What's the problem with inflation?

Post by zbigi »

prudentelo wrote:
Fri Jul 01, 2022 10:49 am
zibigi says on other thread he has a 1.25% SWR but still went back to work.
It's partially due to current instability and partially because I'm filrting with a more spendy life, which could bump my SWR to the 2.2%-2.5% area. I'm learning that, contrary to ERE ideals, I do actually see value in spending money just for fun and also don't neccessarily enjoy DYIing everything myself. I may be in the wrong forum, but the other FIRE-related forums aren't nearly as interesting :)
Some times I wonder if ERE is not kind of "self therapy
Definitely it can be. If you're in a terrible job or find your life just lacking in general, you can talk yourself into grinding for the next X years so that you can ERE. And then learn that you don't actually want to live the ERE lifestyle.

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Mister Imperceptible
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Re: What's the problem with inflation?

Post by Mister Imperceptible »

prudentelo wrote:
Fri Jul 01, 2022 10:36 am
"It's very likely that if a reversion to mean CAPE takes place, other assets will infate (or at least remain inflated) during the equity losses."

Why?
A continuing reversion to mean for equities will eventually cause some investors to seek returns in other asset classes. As long as the buy the dip scheme has continued to work this has been untested. If the Pavlovian response to buy the dip starts getting punished instead of rewarded, the supposedly unmoveable asset allocations and unshakable confidence will start to move and shake, ya feel me?

More simply:
classical_Liberal wrote:
Sun Jan 05, 2020 3:59 pm
Capital must go somewhere.

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Mister Imperceptible
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Re: What's the problem with inflation?

Post by Mister Imperceptible »

prudentelo wrote:
Fri Jul 01, 2022 10:36 am
I am not sure anything was not overpriced and the reason was systemic: problem comes from money supply not equites.
I suppose this depends on what your opinion of equity valuations were prior to the more recent engorgement of the money supply. Low rates meant growth stocks with distant prospects of profitability were held confidently (tech stocks have traded like 50 year bonds), but as Dr. Fisker stated on the page 1 of this thread, high inflation makes holding these long duration assets untenable. And these are the assets that are currently widely held.

But I think this forces investors to be honest about what is really viable as a business.

prudentelo
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Re: What's the problem with inflation?

Post by prudentelo »

Why is that different than real estate with cap rate of 1%

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Mister Imperceptible
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Re: What's the problem with inflation?

Post by Mister Imperceptible »

It is different in many ways, one of which is that even a 1% capitalization rate means it is already profitable now, instead of the distant future, with some expectation to hedge inflation over long periods of time, while also having the utility of being able to live in it.

But as people usually tend to buy a 30 year stream of mortgage payments and not a house, it is also interest rate sensitive. Also the cap rate might go down if there are not enough gainfully employed people to afford the rent.

prudentelo
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Re: What's the problem with inflation?

Post by prudentelo »

CAPE33 stocks = 3% yield "profitable now"

but capital depreciation can be >3% in 1 year


Same with overpriced real estate in condition of financial repression

WFJ
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Re: What's the problem with inflation?

Post by WFJ »

IMHO, the only way to mitigate the risk of inflation is to return to work. Unless you have been putting $10k/year in Series I bonds for 10+ years (but then giving up ridiculous market returns during that time) or be a talented TIPS investor (no idea how to do this), there are few other ways to mitigate inflation without taking on more risk. I've dabble in inflation hedges over the past 6 months and all failed (most recently energy which had been the only inflation hedge working YTD). If inflation is bad enough to force a return to work, will be a barista at Starbucks making $100/hour, all other hedging strategies appear to be too costly or risky to implement.

ertyu
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Re: What's the problem with inflation?

Post by ertyu »

If interest rates stay below inflation as many say they will (to deal with the level of debt that's been accumulated), borrowing money to invest in physical assets isn't a bad strategy either, even at variable rates

ducknald_don
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Re: What's the problem with inflation?

Post by ducknald_don »

@ertyu That depends on how long you think it will last. I'm not convinced it is here for the long term.

WFJ
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Re: What's the problem with inflation?

Post by WFJ »

ertyu wrote:
Fri Jul 08, 2022 5:56 pm
If interest rates stay below inflation as many say they will (to deal with the level of debt that's been accumulated), borrowing money to invest in physical assets isn't a bad strategy either, even at variable rates
One needs to know which physical assets will track inflation, this is not easy to do ex-ante.

If interest rates stay below inflation rate, we will all be in serious trouble :(.

chenda
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Re: What's the problem with inflation?

Post by chenda »

WFJ wrote:
Fri Jul 08, 2022 2:49 pm
IMHO, the only way to mitigate the risk of inflation is to return to work.
Or invest directly in a private business with inelastic demand. Like a hairdressers.

Though for all the headlines about double digit inflation the only thing which has gone up for me is electricity, which has tripled in the last 6 years or so. All the other things I buy seem about the same, maybe a few quid extra here and there but my budget hasn't needed to otherwise adjust.

And petrol has soared but I don't own a car so its not much of an issue. An ERE/MMM style lifestyle immunes you from a lot of this.

chenda
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Re: What's the problem with inflation?

Post by chenda »

WFJ wrote:
Thu Jun 30, 2022 3:11 pm
Had I been Fed chair, would have raised rates to 3%-5% in 2010 and avoided all this mess, but Yellen wanted to become Treasury chair and needlessly maintained ZIRP for 6 more years. We are now stuck with this mistake.
But how much more mass employment and political unrest would you have willing to tolerate?

Incidentally I don't recall the inflation will hit us in 10 year caveat made at all prominent circa 2010. I recall lots of predictions that we were on the verge of early-Weimer style hyper inflation. Niall Fergerson imfamously claimed the US was already experiencing double digit inflation and the government was cooking the books. He later admitted he was wrong. Kinda.

Speaking of Weimer Germany people often forget the Nazis came to power (voted into office) on the back of mass unemployment of the early 1930s not on the hyper inflation of the early 1920s. Mid Weimer Germany enjoyed considerable prosperity. Even JL Collins made this elementary error in The Simple Path to Wealth. Which made Germany's post 2008 obession with inflation and 'fiscal responsibility' for Greece (which had over borrowed to buy German exports) even more bizarre.
Last edited by chenda on Wed Jul 13, 2022 3:27 pm, edited 1 time in total.

white belt
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Re: What's the problem with inflation?

Post by white belt »

chenda wrote:
Wed Jul 13, 2022 2:51 pm
But much more mass employment and political unrest would you have willing to tolerate?
I think it’s more like the bandaid argument. Would you rather rip it off quickly and deal with discomfort for 6 months to a year? Or would you rather slowly pull it off and deal with decades of issues? The political answer at least in developed countries is usually just to kick the can down the road.

I’ve heard a similar argument about the rate of Fed rate rises recently. Some say that instead of playing this game of .75% rises every month, the Fed should’ve just come out with a >2% rise in rates initially because it would remove any doubt about the Fed’s commitment to fight inflation. Of course fast rate rises tend to cause complex nth order effects due to dislocations, so there is no guarantee that such a path would actually be less pain overall.

WFJ
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Re: What's the problem with inflation?

Post by WFJ »

chenda wrote:
Wed Jul 13, 2022 2:51 pm
But how much more mass employment and political unrest would you have willing to tolerate?
Is it better to jump off a 1 story building or 12 story building? Waiting to jump only makes the landing more painful. 12 years of ZIRP has created an extremely hard landing that will break many people. Of course, had I raised rates to a normal level in 2010, I would not have been rewarded with a cushy job as the Treasury Secretary in 2020, as happened with Yellen.

Some people slowly pull off a band aide or slowly break up with wife/SO. It only prolongs the pain. Inflation is an evil tax as it primarily affects the poor, working class and retired. The fact that several politicians and some in the financial media are so cavalier about inflation at nearly 10% is tragic and equivalent to a building jumper claiming everything is fine as they haven't hit the ground yet.

WFJ
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Re: What's the problem with inflation?

Post by WFJ »

chenda wrote:
Wed Jul 13, 2022 2:33 pm
Or invest directly in a private business with inelastic demand. Like a hairdressers.

Though for all the headlines about double digit inflation the only thing which has gone up for me is electricity, which has tripled in the last 6 years or so. All the other things I buy seem about the same, maybe a few quid extra here and there but my budget hasn't needed to otherwise adjust.

And petrol has soared but I don't own a car so its not much of an issue. An ERE/MMM style lifestyle immunes you from a lot of this.
Do you eat food? Solar powered humans are immune from inflation.

chenda
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Re: What's the problem with inflation?

Post by chenda »

WFJ wrote:
Thu Jul 14, 2022 7:07 pm
Do you eat food? Solar powered humans are immune from inflation.
I don't know what you mean...??

AxelHeyst
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Re: What's the problem with inflation?

Post by AxelHeyst »

The price of food seems to have gone up as well. WFJ is wondering why/how you haven't been impacted by rising food costs.

chenda
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Re: What's the problem with inflation?

Post by chenda »

AxelHeyst wrote:
Fri Jul 15, 2022 3:43 am
The price of food seems to have gone up as well. WFJ is wondering why/how you haven't been impacted by rising food costs.
I've just not noticed any substantial increase in food costs, or anything else other than energy. I track my spending quite closely and inflation has not really registered.

I'm not saying the figures are wrong but maybe buying more raw ingredients and less processed food means my 'basket' is different from the average basket.

chenda
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Re: What's the problem with inflation?

Post by chenda »

WFJ wrote:
Thu Jul 14, 2022 7:06 pm
Is it better to jump off a 1 story building or 12 story building?
I'd argue we did jump of the 12 story building in 2010 which would have been made even worse by raising IR, at a time of high unemployment and low inflation. The political consequences of this are very clear to see.

Ukraine and Covid were entirely unpredictable in 2010 yet are been used to retrospectively justify very bad ideas.

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