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"....boomers now sell off assets to finance retirement, putting pressure on equity prices and denying young workers an easy route to wealth" Not true. Imagine

by meric 14y ago

"....boomers now sell off assets to finance retirement, putting pressure on equity prices and denying young workers an easy route to wealth" Not true. Imagine if all stocks had 250 P/E and are now coming back down to 10 P/E in one month. Who benefits? Cheaper equity means higher yield, and higher yield means an easy route to wealth. If you are young, don't let the reserve bank fool you into thinking rising prices is good. You have a whole life of investing in you. Would you celebrate every time, after you fill up a tank of petrol, the price of petrol goes up? That's ridiculous, and I encourage you to think the same for prices of investments. Prices are kept high means when you buy the overpriced investments from other people, some of your wealth is being transferred to them.

AnthonyMouse 14y ago
>Would you celebrate every time, after you fill up a tank of petrol, the price of petrol goes up? The flaw in the analogy is that inflation isn't the price of petrol, it's the price of everything. Including wages. If in week 1 you make $1000 and spend $1000 and in week two all prices go up (including the price of your labor) so that you make $2000 and spend $2000, you don't actually care that the nominal price of commodities is increasing as long as they don't rise faster than your pay. And most investments work the same way: If you own a share of Ford and the Fed prints a trillion dollars, the nominal share price is going to go up the same as the price of anything else. The people inflation hurts are those who have long-term agreements with fixed price terms. If you have a fixed-rate mortgage, you benefit from inflation, and the bank that owns the mortgage pays for it. If you have a ten year fixed-rate certificate of deposit, the bank benefits from inflation and the CD holder takes the beating. But as a general rule, retirees will tend to be the ones who have CDs or fixed-rate annuities or the like, and the youth will be the ones to have student loans or owe large amounts of principal on a mortgage.
- meric 14y ago
  Sorry, I meant in real terms but I didn't specify it. Or they'll be like me with barely $5000 invested in stocks - To get a comfortable retirement I'll probably need to invest at least $10,000 a year. However, if the price of investments rise faster than my wage, I'll need to spend more to purchase investments to produce the same absolute yield. The income from my investments would also be reduced (due to reduced yield). You can argue they are capital gains, but the "capital gains" would only be permanent if the company's assets or income was increased permanently. What I am saying is the increase in price for investments resulting in lower yield without justification is not a good thing for buyers of said investments. I have a $50,000 student debt owed to the government, whose interest is indexed to CPI. There is no point for me to pay off my loan early besides what the government requires me to do. So, I constantly invest my excess earnings.
  - AnthonyMouse 14y ago
    >Sorry, I meant in real terms but I didn't specify it. You can't have inflation "in real terms" -- real means adjusted for inflation. What you're talking about is increases in the relative value of one thing over another, e.g. the price of gas or stock goes up while the price of labor stays the same. But that isn't caused by printing money, it's caused by Peak Oil and concentration of wealth. >There is no point for me to pay off my loan early besides what the government requires me to do. You mean other than the fact that the interest rate on the loan (even subsidized loans) is likely to be higher than the risk-adjusted return on most investments? There are two primary reasons to invest new income instead of paying off money you've borrowed at interest. The first is that you have an investment opportunity (like your own business) which you're confident can produce a higher return on the investment than you're paying in interest on the loan. The second is that you anticipate a significant probability that you'll need to spend the money in the short to medium future, and the interest rate on re-borrowing the money you've paid back will be sufficiently higher than the rate you have on the existing loan to absorb the relative gains you'll make by not paying loan interest in the interim. Don't let "low" interest rates fool you -- they're low compared to unsecured and unsubsidized loans, but they're still high compared to the ROI you get from investing in typical index funds.

by meric 14y ago

AnthonyMouse 14y ago

>Would you celebrate every time, after you fill up a tank of petrol, the price of petrol goes up? The flaw in the analogy is that inflation isn't the price of petrol, it's the price of everything. Including wages. If in week 1 you make $1000 and spend $1000 and in week two all prices go up (including the price of your labor) so that you make $2000 and spend $2000, you don't actually care that the nominal price of commodities is increasing as long as they don't rise faster than your pay. And most investments work the same way: If you own a share of Ford and the Fed prints a trillion dollars, the nominal share price is going to go up the same as the price of anything else. The people inflation hurts are those who have long-term agreements with fixed price terms. If you have a fixed-rate mortgage, you benefit from inflation, and the bank that owns the mortgage pays for it. If you have a ten year fixed-rate certificate of deposit, the bank benefits from inflation and the CD holder takes the beating. But as a general rule, retirees will tend to be the ones who have CDs or fixed-rate annuities or the like, and the youth will be the ones to have student loans or owe large amounts of principal on a mortgage.

meric 14y ago
Sorry, I meant in real terms but I didn't specify it. Or they'll be like me with barely $5000 invested in stocks - To get a comfortable retirement I'll probably need to invest at least $10,000 a year. However, if the price of investments rise faster than my wage, I'll need to spend more to purchase investments to produce the same absolute yield. The income from my investments would also be reduced (due to reduced yield). You can argue they are capital gains, but the "capital gains" would only be permanent if the company's assets or income was increased permanently. What I am saying is the increase in price for investments resulting in lower yield without justification is not a good thing for buyers of said investments. I have a $50,000 student debt owed to the government, whose interest is indexed to CPI. There is no point for me to pay off my loan early besides what the government requires me to do. So, I constantly invest my excess earnings.
- AnthonyMouse 14y ago
  >Sorry, I meant in real terms but I didn't specify it. You can't have inflation "in real terms" -- real means adjusted for inflation. What you're talking about is increases in the relative value of one thing over another, e.g. the price of gas or stock goes up while the price of labor stays the same. But that isn't caused by printing money, it's caused by Peak Oil and concentration of wealth. >There is no point for me to pay off my loan early besides what the government requires me to do. You mean other than the fact that the interest rate on the loan (even subsidized loans) is likely to be higher than the risk-adjusted return on most investments? There are two primary reasons to invest new income instead of paying off money you've borrowed at interest. The first is that you have an investment opportunity (like your own business) which you're confident can produce a higher return on the investment than you're paying in interest on the loan. The second is that you anticipate a significant probability that you'll need to spend the money in the short to medium future, and the interest rate on re-borrowing the money you've paid back will be sufficiently higher than the rate you have on the existing loan to absorb the relative gains you'll make by not paying loan interest in the interim. Don't let "low" interest rates fool you -- they're low compared to unsecured and unsubsidized loans, but they're still high compared to the ROI you get from investing in typical index funds.