4 ms·

The 70s were the worst time to be an investor in terms of real returns. Even worse than the 30s, which saw deflation, so the real return was actually not as bad

by cko 4y ago

The 70s were the worst time to be an investor in terms of real returns. Even worse than the 30s, which saw deflation, so the real return was actually not as bad in comparison. Also, the market would not react well if the Fed signalled they'd go any higher than 5%. If I knew 11% was happening, I think I'd liquidate to cash now, then go 60/40 when it happens. (Currently I'm 100% equities.)

bjornsing 4y ago
But cash has a negative real return of ~11% in that situation, right? You would just eat that? I’m 90% in equities, with a short position in German Bunds (their treasuries) as a hedge. I’m also borrowing against those equities (at a 2.18% rate), so you could say I’m 137% in equities. This feels risky, but I don’t know what I could do otherwise. I hate the idea of sitting in cash with a guaranteed negative real rate of return of about -10% per year, even if it’s for a short period of time. Also, what happens if the Fed doesn’t stamp out inflation in that case? Wouldn’t that force people to buy equities like crazy?
- cudgy 4y ago
  Why not diversify? Or utilize options to hedge stock bets? A 0% return is better than losing 10% holding cash or 40% holding all equities. Or Simple move is Just buying CD’s will get you 3% (still negative 5% real rate but better than all cash) and rising daily.
- cko 4y ago
  I think I'd eat it in this contrived hypothetical scenario in which I had crystal ball. I don't see how equities and bond funds don't fall 40% or more on the way to 11%. Obviously no one knows the future so I'm heavily tilted to small cap value and equal-weight large cap value funds, which seem to do well in inflationary times. Are you getting 2% margin loan from something like IB or M1? With what vehicle are you short those Bunds? I'm curious.
  - bjornsing 4y ago
    > Are you getting 2% margin loan from something like IB or M1? I’m in Sweden so I’m getting it from my broker: https://www.avanza.se https://www.avanza.se > With what vehicle are you short those Bunds? I'm curious. I bought a bit of this: https://www.avanza.se/borshandlade-produkter/certifikat-torg/om-certifikatet.html/978640/bear-bund-x3-von2 https://www.avanza.se/borshandlade-produkter/certifikat-torg...
  - bjornsing 4y ago
    > I don't see how equities and bond funds don't fall 40% or more on the way to 11%. Do you think that applies to all equities, and if so why? I’ve mostly bought equities that I think will do relatively well in an inflation environment, e.g. because they have a lot of fixed assets and pricing power. For example I’ve bought nuclear power in France, uranium mines in Canada and Amazon. But admittedly I haven’t had time to really research their financials. Why would stocks like that loose 40% though? If the Fed really stamps out inflation by drastically raising rates then shouldn’t the market see the end of it pretty soon and be willing to bet on stuff that will survive (as a store of value in real terms)?
    - cko 4y ago
      I guess not all equities. Coke and Exxon will probably be okay, but I don't buy individual stocks.
- mellavora 4y ago
  > Also, what happens if the Fed doesn’t stamp out inflation in that case? Wouldn’t that force people to buy equities like crazy? At a very rough level, no. Stocks are valued based on discounted cash flow (in general and over the long term. Plenty of short-term exceptions, i.e. Tesla future earnings costing 18x more than Fords future earnings). A higher interest rate, i.e. inflation, lowers the value of those future earnings. Stock prices today represent an extreme historical outlier in terms of the price people are paying for future earnings. This might make sense if we assume low inflation for the next 30 years. It does not make sense in a high inflation scenario. Reasonable scenarios allow the market to fall another 30-50% over the next year or two. Reasonable scenarios allow the markets in 10 years to be roughly where they are today in absolute terms (i.e. before adjusting for inflation).
  - bjornsing 4y ago
    > A higher interest rate, i.e. inflation, lowers the value of those future earnings. Not necessarily. A company with pricing power can raise prices in an inflationary environment. But if the risk free interest rate goes up then it will be tempting to park money there instead of course. That requires the Fed really stamping out inflation though, which I’m not sure they will do.
- tarsinge 4y ago
  > I hate the idea of sitting in cash with a guaranteed negative real rate of return of about -10% per year, even if it’s for a short period of time. I would not be surprised to see equities doing worse than -10%. Sometimes there are no good investments, only loss mitigation, and cash is not necessarily a bad idea.
  - bjornsing 4y ago
    > I would not be surprised to see equities doing worse than -10%. I wouldn’t be surprised by that either, but it’s the wrong question. As long as the expected value of the future price (in today’s USDs) is higher than -10% I’m interested in buying (but the actual decision is a bit more complicated). But I agree cash is not necessarily a bad idea.
t-writescode 4y ago
Didn't many of these old people, enjoying multiple millions of dollars of profit on their houses, buy them in the 70s?
- UncleEntity 4y ago
  If you were lucky enough to be in a hot market… I’m originally from the Bay Area, as were my parents, and the family who still live there are sitting on valuable houses. My dad’s parents bought a house in San Jose in the ‘50s, my uncle’s wife ultimately ended up with it an sold it for multi-millions. My step father’s mother has a house in San Leandro that was bought in the ‘50s and is worth maybe $700k — maybe, totally guessing here. Other family left the Bay Area over the years and bought houses which are nowhere near as valuable because the local markets don’t support that kind of price increases. In ‘90-91 my stepdad’s work closed and some of the people transferred to South Carolina where they bought literal mansions from the difference in housing prices between the Bay Area. A few years later that place closed and they couldn’t sell their houses because nobody could afford them in the local market. Long story short, it depends.

by cko 4y ago

bjornsing 4y ago

But cash has a negative real return of ~11% in that situation, right? You would just eat that? I’m 90% in equities, with a short position in German Bunds (their treasuries) as a hedge. I’m also borrowing against those equities (at a 2.18% rate), so you could say I’m 137% in equities. This feels risky, but I don’t know what I could do otherwise. I hate the idea of sitting in cash with a guaranteed negative real rate of return of about -10% per year, even if it’s for a short period of time. Also, what happens if the Fed doesn’t stamp out inflation in that case? Wouldn’t that force people to buy equities like crazy?

cudgy 4y ago
Why not diversify? Or utilize options to hedge stock bets? A 0% return is better than losing 10% holding cash or 40% holding all equities. Or Simple move is Just buying CD’s will get you 3% (still negative 5% real rate but better than all cash) and rising daily.
cko 4y ago
I think I'd eat it in this contrived hypothetical scenario in which I had crystal ball. I don't see how equities and bond funds don't fall 40% or more on the way to 11%. Obviously no one knows the future so I'm heavily tilted to small cap value and equal-weight large cap value funds, which seem to do well in inflationary times. Are you getting 2% margin loan from something like IB or M1? With what vehicle are you short those Bunds? I'm curious.
- bjornsing 4y ago
  > Are you getting 2% margin loan from something like IB or M1? I’m in Sweden so I’m getting it from my broker: https://www.avanza.se https://www.avanza.se > With what vehicle are you short those Bunds? I'm curious. I bought a bit of this: https://www.avanza.se/borshandlade-produkter/certifikat-torg/om-certifikatet.html/978640/bear-bund-x3-von2 https://www.avanza.se/borshandlade-produkter/certifikat-torg...
- bjornsing 4y ago
  > I don't see how equities and bond funds don't fall 40% or more on the way to 11%. Do you think that applies to all equities, and if so why? I’ve mostly bought equities that I think will do relatively well in an inflation environment, e.g. because they have a lot of fixed assets and pricing power. For example I’ve bought nuclear power in France, uranium mines in Canada and Amazon. But admittedly I haven’t had time to really research their financials. Why would stocks like that loose 40% though? If the Fed really stamps out inflation by drastically raising rates then shouldn’t the market see the end of it pretty soon and be willing to bet on stuff that will survive (as a store of value in real terms)?
  - cko 4y ago
    I guess not all equities. Coke and Exxon will probably be okay, but I don't buy individual stocks.
mellavora 4y ago
> Also, what happens if the Fed doesn’t stamp out inflation in that case? Wouldn’t that force people to buy equities like crazy? At a very rough level, no. Stocks are valued based on discounted cash flow (in general and over the long term. Plenty of short-term exceptions, i.e. Tesla future earnings costing 18x more than Fords future earnings). A higher interest rate, i.e. inflation, lowers the value of those future earnings. Stock prices today represent an extreme historical outlier in terms of the price people are paying for future earnings. This might make sense if we assume low inflation for the next 30 years. It does not make sense in a high inflation scenario. Reasonable scenarios allow the market to fall another 30-50% over the next year or two. Reasonable scenarios allow the markets in 10 years to be roughly where they are today in absolute terms (i.e. before adjusting for inflation).
- bjornsing 4y ago
  > A higher interest rate, i.e. inflation, lowers the value of those future earnings. Not necessarily. A company with pricing power can raise prices in an inflationary environment. But if the risk free interest rate goes up then it will be tempting to park money there instead of course. That requires the Fed really stamping out inflation though, which I’m not sure they will do.
tarsinge 4y ago
> I hate the idea of sitting in cash with a guaranteed negative real rate of return of about -10% per year, even if it’s for a short period of time. I would not be surprised to see equities doing worse than -10%. Sometimes there are no good investments, only loss mitigation, and cash is not necessarily a bad idea.
- bjornsing 4y ago
  > I would not be surprised to see equities doing worse than -10%. I wouldn’t be surprised by that either, but it’s the wrong question. As long as the expected value of the future price (in today’s USDs) is higher than -10% I’m interested in buying (but the actual decision is a bit more complicated). But I agree cash is not necessarily a bad idea.

t-writescode 4y ago

Didn't many of these old people, enjoying multiple millions of dollars of profit on their houses, buy them in the 70s?

UncleEntity 4y ago
If you were lucky enough to be in a hot market… I’m originally from the Bay Area, as were my parents, and the family who still live there are sitting on valuable houses. My dad’s parents bought a house in San Jose in the ‘50s, my uncle’s wife ultimately ended up with it an sold it for multi-millions. My step father’s mother has a house in San Leandro that was bought in the ‘50s and is worth maybe $700k — maybe, totally guessing here. Other family left the Bay Area over the years and bought houses which are nowhere near as valuable because the local markets don’t support that kind of price increases. In ‘90-91 my stepdad’s work closed and some of the people transferred to South Carolina where they bought literal mansions from the difference in housing prices between the Bay Area. A few years later that place closed and they couldn’t sell their houses because nobody could afford them in the local market. Long story short, it depends.