vinod1

Not much. Unless you are talking about world ending events not happening. In which case it does not matter, what the stock returns were. Look at every single country in the world with stock markets and look at the returns. Well, we have that. Read 101 years of stock returns but Dimon, et all. Say inflation is 10,000% or prices increase 100 fold. What happens? Corporate revenues increase roughly 100 fold. It has to, otherwise there would be no inflation. We are looking at the two sides of the same coin. Lets say profit margins get cut in half and PE multiples get cut in half. You end up with some fraction of your wealth. Stocks would benefit from some real growth that is occurring and the debts they take gets wiped out (thanks to bond investors). Bond investors get wiped out. This is what happened in other hyper inflation episodes which are an extreme case. So there you have it. In the next to worst case scenario (worst case being economy totally destroyed as in total nuclear holocaust or a meteor wiping out earth, communist takeover), stocks are still the best investment compared to bonds. Equity premium is actually pretty high in this case! Vinod

A good paper that deals with some of this is, Equity Risk Premiums (ERP): Determinants, Estimation and Implications - The 2023 Edition https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4398884

You are slaying a strawman that no one is arguing about. Over the long term earnings of companies in the economy as a whole do better than keep up with inflation. Please do note the two points I bolded and underlined. Nothing is guaranteed. Earnings do not increase in lockstep with inflation. Profit margins go up and down. Inflation or deflation happens. But over the long run, corporate earnings as a whole keep up with inflation and then some. PE multiples go up and down. That is a separate factor. The point I am making is, you don't compare corporate earnings (which go up) and its yield with bond market yield which is fixed. This is exactly the error made by the investment community as a whole until the 1950s when they used to compare dividend yield of the market with bonds. You can read more about this if interested. When someone says "earnings yield" of stocks as an approximate return, they mean real return not nominal return. For bonds, the yield you get is the expected nominal return. Both assuming no changes in valuation. Now you do not go about comparing these two as if they are similar, they are not. This is so widely understood and utterly uncontroversial, I am surprised that I need to highlight this. Vinod

The author is making an elementary mistake - comparing a stock earnings yield with a nominal government bond yield. Comparing a real number with a nominal one. If you are going to compare use TIPS.

A lot of wisdom packed into this paragraph. Agree 100%. There had been a 25% correction in stock prices due to inflation beyond what you see on the nominal S&P 500 index value. People talk about now getting 4% on cash while waiting for the stock market to correct and are happy to be getting "paid" whereas in the past they have to settle for 0% returns. If one is thinking in real inflation adjusted terms, now they are worse off actually - getting paid 4% on which you pay taxes while inflation is 5% is worse than losing 1% on inflation while earning 0%. I was in London and Paris the past week and restaurant prices seemed about same or slightly cheaper to me than in the DC metro area. I can eat out at a restaurant overlooking Notre Dame for the same price as at a mainstream chain in a US suburb. This seems crazy to me. US did experience very significant inflation in the past couple of years. Vinod

Every idiot who underperforms blames the fed. This has been the theme for the last decade.

This is the Great Imaginary Financial Crisis (GIFC) of 2023. It seems a lot of people just realized that bond yields and bond price are inversely related and particularly this seems like a magical revelation among the tech bros. Banks are in good shape. As always, any bank that has a run will collapse. If a bank has a run and still does not collapse, it is doing something wrong. If we are going to have financial drama, I am all for it.

There is a difference between Statutory Accounting Principles (SAP) used by insurance regulators to assess an insurer's viability vs. GAAP which focuses on financial reporting of economic profits. SAP is more focused on solvency and per my understanding uses amortized cost not MTM. GAAP allows either based on HTM or Trading Assets and profits are reported based on this classification. So yes, to the extent that any insurance company did not use HTM, they would have booked gains and now have to book losses. But insurance regulators are not looking at GAAP book value, they are looking at Statutory Surplus (Statutory Book Value if you will). Many P&C companies have 5-6 year on average for payout. So any given year you are looking at 15%to 20% of portfolio that needs to be liquidated at a maximum and that if the company is in runoff. Most likely it is at least maintaining its book of business which means that much in cash in coming on for new investments. So I do not see much impact from bond losses to P&C companies. Even if you assume they liquidate 20% of bond portfolio and that fell 15%, we are talking about a 3% hit to overall portfolio. Simply no way P&C can be compared to a bank which is subject to runs. Most P&C companies use ALM strategies. In fact that is a core function. Their payoffs closely match the bond portfolio. My biggest position is FFX for little over an year. First bought sometime in 2005/6/7 I think at $106, completely exiting in 2011 at $418, sat out most of the last decade except for a cigar puff buy and sell for tiny bumps. I did not trade any stocks in all of 2021 and did not look at the market and hence did not realize how cheaply it was trading. I went to all index in 2020 soon after the pandemic to focus on my kids as I knew if I have any individual stocks I would sucked into spending a lot of time on 10K's. I again started looking at individual stocks in 2022 and bought FFX again and this time, for a longer term hold. I am not arguing FFX strength at this time. But that does not mean other P&C companies are somehow in trouble.

Insurance is really different from banking. The insured cannot claim hurricane damage for the year and ask for the money to be paid. The liabilities are pretty predictable. That is why ALM is a big deal at P&C's.

The level of ass kissing is nauseous. Cost of doing business in India.

It is said that the last refuge of scoundrels' in patriotism. I find the last refuge of underperforming investment managers/investors is blaming the fed. Low rates, fed is enriching the rich. High rates, fed is hurting the poor. The fed did get a few things wrong. Some of their choices are a bit baffling, but not entirely so if you can just try to think from their point of view. I think they are doing a wonderful job. Perhaps the best of any government institution in USA.

I agree completely that you should do what gives you the most peace of mind. After all what better use of the money? That said, you are leaving a lot of money on the table. If you have a $500k mortgage at under 3% rate for 30 years, you are going to have about $500k less after 30 years due to this - using average balance over the years and 4% higher rate of return than mortgage rate. Also you still have the real estate taxes that need to be paid. So it is not exactly free and clear ownership even if you paid off the mortgage. It is only a question paying less. Personally I get a kick out of knowing I am paying 2.5% rate, as even the most credit worthy Governments cannot get this rate for most of history for borrowing over 30 years.

Dimon wrote in one his annual letters that when the Fed asks him to buy out another financial entity he would say "No Thanks".

Almost! 20 percent! increase! in! exclamation! points! from! 2021 AL! 27 to 32!!!!!!!!

It is bit concerning to think OMG! The only reason you are not murdering your neighbors and raping women is because the Invisible Man said so? If for some reason, they were not mentioned or if there is a over-the-air update to the rules from the Invisible Man in the future which allows these things, you would merrily go along?

Buffett has never let his macro views influence how much of his portfolio would be in stocks versus cash. Even when he went out of the way to warn about high valuations in the broad market, possibility of sustained high inflation, and large dollar devaluation, he did not let these concerns influence his portfolio. In retrospect, it is clear that he would not have had his record if he sold out of stocks every time he thought the market or even his holdings were fully priced. The perfect example is in 2009: We’re certain, for example, that the economy will be in shambles throughout 2009 – and, for that matter, probably well beyond – but that conclusion does not tell us whether the stock market will rise or fall. -Buffett

Perhaps Buffett is confused about these too... Don't pass up something that's attractive today because you think you will find something way more attractive tomorrow. or Charlie and I don’t pay any attention to macroeconomic predictions. We don’t know the future of the “macro” and I can’t remember a single investment decision that hinged on the macro. We have a little conceit, that if we don't know, who would? But people do it all the time: talking about the macroeconomic future—but this isn’t productive. They don’t really know what they’re talking about. To ignore what you know to listen to what someone else who doesn't know, doesn't make sense. People will do well if they own solid businesses (if they didn’t overpay). If they attempt to time their purchases, they will do well for their broker but not for themselves. or Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children. or A different set of major shocks is sure to occur in the next 30 years. We will neither try to predict these nor profit from them. or Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important.

There is a good article that is worth reading called "What if You Only Invested at Market Peaks?". Basically about a guy who saves all his money up to that point and ends up investing just the day before start of the last 4 major bear markets and what his results where. I did not check the data but passes the smell test. https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/

Read Grantham's latest. His fair value for S&P 500 is 3200. His assumption on required return is 6.5% real (not stated in article but I have been following him for 20+ years and understand his methodology). So about 9% nominal. Change to 8% and fair value ends up being 3600-4000 range which is my estimate. Vinod

There is no government manipulation of inflation data. It is just a difficult thing to measure and the bureaucrats actually do a pretty good job. One of the few. Inflation is highly personal and each of us experience differently. As they say our personal experience trumps any data. I bought a Camry LE in 1997 for $19,500. Another Camry LE in 2011 for $20,000. PC's, phones, cameras, etc. All cheaper and better. There are a lot of clothes, shoes and other stuff that were outsourced and quality went down but they got cheaper. They became more of a use a few times and throw. There is a billion prices project that produces inflation figures similar to official data. http://www.thebillionpricesproject.com/ Vinod

Thanks!

I am talking about estimate for transaction/expenses/etc prior to the 1950s for holding diversified portfolio of stocks. I follow Damodaran's work and learned more from his "Investment Valuation" book than from CFA exams.

Not very familiar with agency mortgage bonds but I would think that the 6% bonds would be called if rates dip again and you would end up with reinvestment risk. Please correct me on this. Vinod

Inflation is never good for any financial asset. The argument is what holds the most value long term in case of massive inflation. Just for kicks, if you model an inflation of 10% for 20 years in US. Real GDP growth of 1 or 2%. Profit margins collapsing by half to 6% range from 12% now. PE multiples falling to 10. You still end up with 9-11% equity returns. Not good at all. But most likely far better than bonds. If inflation is going to be 10% over such a long period means Fed is likely not keeping rates high. In which case, cash would suck as well. Vinod