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Open question: won't inflation lead to mechanically higher stock prices, specially if it's demand driven? Say we give duplicate the amount of money in the econ

Open question: won't inflation lead to mechanically higher stock prices, specially if it's demand driven? Say we give duplicate the amount of money in the economy(M1 M2 etc) and prices immediately double. Won't that also double firm revenue, profits, dividends, and thus firm value in nominal terms? Thus, if stock prices and home prices are +10% in nominal terms, with inflation close to 10%, doesn't this mean they are just breaking even?

staticman2 4y ago
That's not how stock prices worked in the 1970s, so no. A lot of the stock price is essentially driven by social psychology, not earnings.
sidewndr46 4y ago
> won't inflation lead to mechanically higher stock prices I'm reasonably certain that is the point of inflation, since everyone seems to measure economic health based off the stock market.
mattnewton 4y ago
Prices don't immediately double. My layman's understanding is that it heavily depends on where you put the new doubled money in the economy, and it's resulting velocity. If you give it to banks they might park it in assets, increasing their prices, but then the money "stops" moving through the economy and doesn't have a large effect on things like food prices for instance. If you give it to people who need to make rent now, then they probably spend it immediately, often to people who also spend it soon, and it has a higher velocity and broadly affects prices before being absorbed into a slower moving asset like a bond or long term stock holding.
datalopers 4y ago
Stocks gave an 88% aggregate return over 2019-2021. I’d say official inflation numbers are just now catching up.
- deleted 4y ago
  [deleted]
trgn 4y ago
It depends on the underlying valuation of the stock, and the industry sector. Stocks for retail/commodities/food/oil... will generally keep up with high inflation, since these industries have low margins and profits track closely to prices. There will even be some speculation, so it might pop in these environments, only to come down when clarity returns. Growth stock will be obliterated in high inflation environment, because they're valued for future profits, which will be worth less because money is worth less. Business services, entertainment, ... kind of wavers in between.
incomingpain 4y ago
>Open question: won't inflation lead to mechanically higher stock prices, specially if it's demand driven? Mechanically higher not-USD things. Crypto, stocks, real estate, gold. >Say we give duplicate the amount of money in the economy(M1 M2 etc) and prices immediately double. Won't that also double firm revenue, profits, dividends, and thus firm value in nominal terms? It wont evenly distribute amongst crypto, stocks, real estate, gold, etc >Thus, if stock prices and home prices are +10% in nominal terms, with inflation close to 10%, doesn't this mean they are just breaking even? Oh ya, like you have to compare inflation to GDP to interest rates. If GDP was 15% and inflation was 10% and interest rates are 10%. Those are some big numbers but not really a giant problem or anything. Social mobility would be fantastic in those numbers. Reality: GDP is 6.9 with previous of 2.3, inflation 8.5%, and interest rates are 0.5%. YTD S&P500 is -6.75% while 1y is 7.3% In reality the GDP figure is fake, temporary boost that wont be able to hold on.
lottin 4y ago
In short, yes. Inflation is an increase in the price level, and as such it only affects nominal prices, not relative prices. So the price of goods and services in relation to the price of your work (i.e. your salary) remains constant. Nothing becomes more expensive/cheaper in real terms, as a result of inflation. Although in practice this isn't entirely true.
JumpCrisscross 4y ago
> won't inflation lead to mechanically higher stock prices, specially if it's demand driven? Yes, to a point. Stocks are priced in nominal dollars because revenues are earned and dividends paid in nominal dollars. Endemic inflation screws with an economy, however. That reduces its productivity. First real returns falter. Then investors abandon the market.
kobalsky 4y ago
> Open question: won't inflation lead to mechanically higher stock prices, specially if it's demand driven? this has been answered already but I want to add something that wasn't mentioned: if you are thinking about it now, the market thought about it months before you and it's probably already baked in the current price. so don't expect a 10% increase in 1 year on spy even if everything goes up 10%. that 10% was grabbed by the better informed the moment the money printers were turned on.
- shostack 4y ago
  Which raises the question of how the bogleheads strategy weathers an inflationary economy. Since apparently that's all Main St. can do.

staticman2 4y ago

That's not how stock prices worked in the 1970s, so no. A lot of the stock price is essentially driven by social psychology, not earnings.

sidewndr46 4y ago

> won't inflation lead to mechanically higher stock prices I'm reasonably certain that is the point of inflation, since everyone seems to measure economic health based off the stock market.

mattnewton 4y ago

Prices don't immediately double. My layman's understanding is that it heavily depends on where you put the new doubled money in the economy, and it's resulting velocity. If you give it to banks they might park it in assets, increasing their prices, but then the money "stops" moving through the economy and doesn't have a large effect on things like food prices for instance. If you give it to people who need to make rent now, then they probably spend it immediately, often to people who also spend it soon, and it has a higher velocity and broadly affects prices before being absorbed into a slower moving asset like a bond or long term stock holding.

datalopers 4y ago

Stocks gave an 88% aggregate return over 2019-2021. I’d say official inflation numbers are just now catching up.

deleted 4y ago
[deleted]

trgn 4y ago

It depends on the underlying valuation of the stock, and the industry sector. Stocks for retail/commodities/food/oil... will generally keep up with high inflation, since these industries have low margins and profits track closely to prices. There will even be some speculation, so it might pop in these environments, only to come down when clarity returns. Growth stock will be obliterated in high inflation environment, because they're valued for future profits, which will be worth less because money is worth less. Business services, entertainment, ... kind of wavers in between.

incomingpain 4y ago

>Open question: won't inflation lead to mechanically higher stock prices, specially if it's demand driven? Mechanically higher not-USD things. Crypto, stocks, real estate, gold. >Say we give duplicate the amount of money in the economy(M1 M2 etc) and prices immediately double. Won't that also double firm revenue, profits, dividends, and thus firm value in nominal terms? It wont evenly distribute amongst crypto, stocks, real estate, gold, etc >Thus, if stock prices and home prices are +10% in nominal terms, with inflation close to 10%, doesn't this mean they are just breaking even? Oh ya, like you have to compare inflation to GDP to interest rates. If GDP was 15% and inflation was 10% and interest rates are 10%. Those are some big numbers but not really a giant problem or anything. Social mobility would be fantastic in those numbers. Reality: GDP is 6.9 with previous of 2.3, inflation 8.5%, and interest rates are 0.5%. YTD S&P500 is -6.75% while 1y is 7.3% In reality the GDP figure is fake, temporary boost that wont be able to hold on.

lottin 4y ago

In short, yes. Inflation is an increase in the price level, and as such it only affects nominal prices, not relative prices. So the price of goods and services in relation to the price of your work (i.e. your salary) remains constant. Nothing becomes more expensive/cheaper in real terms, as a result of inflation. Although in practice this isn't entirely true.

JumpCrisscross 4y ago

> won't inflation lead to mechanically higher stock prices, specially if it's demand driven? Yes, to a point. Stocks are priced in nominal dollars because revenues are earned and dividends paid in nominal dollars. Endemic inflation screws with an economy, however. That reduces its productivity. First real returns falter. Then investors abandon the market.

kobalsky 4y ago

> Open question: won't inflation lead to mechanically higher stock prices, specially if it's demand driven? this has been answered already but I want to add something that wasn't mentioned: if you are thinking about it now, the market thought about it months before you and it's probably already baked in the current price. so don't expect a 10% increase in 1 year on spy even if everything goes up 10%. that 10% was grabbed by the better informed the moment the money printers were turned on.

shostack 4y ago
Which raises the question of how the bogleheads strategy weathers an inflationary economy. Since apparently that's all Main St. can do.