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GLDM seems to have lower expenses at 0.18% vs. GLD's 0.40%.

 

Yes -but what about the underlying SG&A expenses of the companies in the miners index?  I view the gold miners index as a bad compromise - its a mix of buying a basket of businesses and sort of getting exposure to gold.  And the businesses are mining businesses of course - which I probably would never invest in on their own.

 

I want near-pure exposure to the yellow metal (which is what I'm looking for).   I'm sure there are great management teams among the gold miners - but again, if I want to invest in a business, I can do that myself across all kinds of industries at better returns.   So I separate the two - gold vs investing in businesses. 

 

wabuffo

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22 minutes ago, wabuffo said:

GLDM seems to have lower expenses at 0.18% vs. GLD's 0.40%.

 

Yes -but what about the underlying SG&A expenses of the companies in the miners index.  You are basically buying a bunch of mining companies who waste capex and pay themselves well.  Its a business (and a bad one) vs near-pure exposure to the yellow metal (which is what I'm looking for).   I'm sure there are great management teams among the gold miners - but again, if I want to invest in a business, I can do that myself across all kinds of industries.

 

wabuffo

 

Thanks wabuffo clarifying.  I see where the disconnect is. 

 

GLDM sounds like it is an ETF composed of gold miners :-).  However, it is not :-). 

 

Both GLD and GLDM are backed by physical gold itself.  Both are created by State Street. 

 

The difference is that GLD has been around for a long time and provides liquidity for large institutional investors.  For that, State Street continues to make them pay 0.4%.

 

Because there was demand for lower expense ratio, State Street created another physical-gold-backed ETF with 0.18% expense ratio, especially to serve the needs of smaller investors that don't need to make huge purchases/sales that need higher liquidity. There are some other differences as well.

 

Please see:

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27 minutes ago, Gregmal said:

What would be the preference for gold vs crude? I think the commentary we've seen recently, highlighted by Tepper the other day is spot on. The environment is hostile to these companies. Demand will increase almost certainly if the factors driving inflation take place, probably even if it doesnt. Meanwhile supply is hamstrung. 

 

"He added the day Exxon Mobil Corp. added activist investors to its board was the time to buy oil stocks -- because it signaled drilling will eventually decrease over time, and with it supply."

 

This occurred a couple weeks ago and prices arent too far off. If we want store of value, IMO it helps having a use for the store of value. You can do plenty with crude....gold on the other hand pivots back towards the "its worth what someone will pay for it" and BTC is better/equal or well you can make jewelry with it arguments which Ive always felt have merit. 


Michael Kao had an interesting commentary recently. can’t remember if someone else already posted this on another thread.
 

 

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Both GLD and GLDM are backed by physical gold itself.

 

Oh sorry about that.   There are quite a few gold bullion ETFs.   PHYS, IAU, SGOL, BAR, GLDM, OUNZ, AAAU.

 

Never looked at any others except for GLD - perhaps I should look at all of them to see if they might be a better fit for what I'm trying to do.  It would also be helpful if they have listed LEAP Call options.

 

Thanks,

wabuffo

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^ @Castanza  yea thats kind of what I'm trying to get at. Will earmark this for a weekend watch. But basically, you need the most responsive yo-yo here. Its a somewhat tricky landmine to navigate and the last thing one wants is to be the next Peter Schiff who screamed about the GFC well in advance and then it turns out his investors got smoked because he invested in the wrong stuff. I see a lot of people like gold, and I dont disagree its poised to do well. However dont see how crude isnt a superior hedge in every aspect. 

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I agree oil is a much better inflation hedge. 

 

That said the only thing we can predict with above 99% certainty with these commodities is that the price in the long run will be above the marginal production cost for the amount of supply needed to meet real needs.  There are still times when the commodity price falls below that price during which the producers of commodity go on sale, and that is a good time to buy. 

 

With oil, that marginal production cost ranges anywhere from $30 to $60, or maybe higher at some time, and then longer term, when consumption goes down, marginal product cost could possibly go down eventually.  We had some opportunities last year when it was trading below that medium term marginal production cost price of at least $30-60.  Even today, it is not too far off from that.  With oil, because some ownership is consolidated, there is possibility of positive surprises. 

 

With gold, the consumption needs for jewelry, tech, and industry are so small, that they could likely easily be met with marginal production cost of below $1000.  It is currently trading far higher than that.  So, there is little downside protection.  There is a possibility of positive surprise here if many neural nets end up getting influenced by historical gold prices and end up pushing them up during high inflation or any other surprises. The probability of such a speculation is higher than probability I'd try to give to any meme stock speculation, but it is still similar-type speculation, except that the influence on human mind is much stronger from much more historical data.  That said, that influence on human mind has gone down a lot since 1970s when we had just come off the gold standard, and there were fewer options for folks to speculate on during 1970s inflation.

 

To diversify beyond oil, anything else folks have considered other than gold, TLT put options, banks, and to some extent, companies with pricing power, to protect against high inflation/interest-rates?  Ideally something that would immediately go up if inflation/interest rates spike just when S&P 500 is bottoming so that one could then sell at peak to get into S&P 500 bottom.  Something that will also not go down if inflation/interest rates don't spike.

 

 

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I kind of like the yellow metal here and bought more today. I regard it as a better alternative to cash basically. Sure, it could go down, but there is also a chance that if inflation kicks in with negative interest rates, that it goes up a lot. Gold has been a store of value for more than 5000 years and I think it will be for a while in the future as well. my vehicle of choice is IAU since it had lower fees than GLD. I wasn’t aware of GLDM so maybe that’s a better alternative.

 

Gold miners are tricky and it isn’t clear that it works well in and inflationary environment. When buying a miner, you are basically making a bet that the mining costs go up less than the price of Gold, which isn’t necessarily a given.

 

In the depression in the 30’s gold miners did well, because the price of gold was fixed and their input costs (labor, materials ) were falling significant, so their margin improved. That’s unlikely to repeat itself however.

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10 hours ago, wabuffo said:

The move from zero is the biggest move.  I was surprised the Fed did it. 

 

3)  the losers - banks who will lose a trillion or more in deposits.
 

Isn't that a good thing that the banks will lose deposits because they were carrying excess deposits on the balance sheet anyway and had no real use for it. Weren't the banks turning away the deposits from corporates anyway?(https://www.wsj.com/articles/banks-to-companies-no-more-deposits-please-11623238200)

 

Do the bank earn anything on these corporate deposits? 

 

Also why did the Treasury do a large issuance recently if they need to bring down the TGA balance soon? 

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It doesn't have to be commodities as an inflation hedge. I think a REIT with long duration debt should hold up ok. You probably get smoked at first but inflation should push through to rents which will drive the ev EBITDA multiple down.

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47 minutes ago, no_free_lunch said:

It doesn't have to be commodities as an inflation hedge. I think a REIT with long duration debt should hold up ok. You probably get smoked at first but inflation should push through to rents which will drive the ev EBITDA multiple down.

 

Which REIT is shareholder oriented enough to have (1) 30-year long mortgages and (2) doesn't have the culture to print shares to buy expensive real estate?

 

If you don't have examples of REITs that satisfy both #1 and #2, how about examples of REITs that satisfy #1? 

 

If you don't have examples of #1, what's the REIT with longest average-weighted mortgage duration you've found? 

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54 minutes ago, no_free_lunch said:

It doesn't have to be commodities as an inflation hedge. I think a REIT with long duration debt should hold up ok. You probably get smoked at first but inflation should push through to rents which will drive the ev EBITDA multiple down.

 

Agree with you here. Some commodities can actually be a poor inflation hedge if technology is rapidly pushing production costs down.

 

Janus Henderson recently wrote about REITs and inflation (https://www.janushenderson.com/en-us/advisor/article/inflation-property-equities-time-to-get-real/). In short they argue if inflation expectations go up, REITs stand to benefit.

 

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LM, Avalon Bay AVB has an avg duration of 10 years and a long history of slowly growing the yield per share. I don't know if you will find 30 year duration on a REIT but let me know if you can.

 

It's not just REITs , any company with physical assets or even just pricing power should make it. Of course I have the perspective that I have no idea what the future holds so I want even my inflation hedges hedged.  Hence a focus on assets that don't require inflation to make some gains.

 

I think telecom could do ok as well.  They have enough pricing power, lots of debt and physical assets.

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Reits are very sensitive to credit market conditions. That means that once there is some sort of a hiccup in the financial system, Reits are going south in a hurry.

 

Crude is not a good inflation hedge because it’s is highly sensitive to marginal demand/ supply imbalances. The changes in crude prices in the past decade had very little to do with inflation.

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46 minutes ago, no_free_lunch said:

LM, Avalon Bay AVB has an avg duration of 10 years and a long history of slowly growing the yield per share. I don't know if you will find 30 year duration on a REIT but let me know if you can.

 

It's not just REITs , any company with physical assets or even just pricing power should make it. Of course I have the perspective that I have no idea what the future holds so I want even my inflation hedges hedged.  Hence a focus on assets that don't require inflation to make some gains.

 

I think telecom could do ok as well.  They have enough pricing power, lots of debt and physical assets.

 

Thanks @no_free_lunch, I couldn't find any REIT that could satisfy my criteria either.  The best is probably to have 30-year mortgages on directly owned real estate. 

 

I agree it doesn't have be just REITs.  Any entity with assets that don't need to be replaced at higher cost, i.e. "rights", that are cash-flowing well that can track at least inflation, trading at a reasonable EV/EBITDA ratio, and has long duration debt that is not too high relative to EBITDA, should do fine over the long run. I include spectrum as such a right as well.  The best I could find here was VZ.

 

However, 10% inflation per year will still take 7 years for prices to double, while 10% interest rates will increase cost of loans & discount rate immediately, potentially creating buying opportunity.  

 

So, I think it has to be balanced approach, where if the inflation/interest rates don't go too high, you do fine, and where if inflation/interest rates go high, you do well there too. 

 

For the scenario of inflation/interest rights going high, and being ready for a buying opportunity, I've also been trying to figure out what could hit high peak in that scenario when S&P 500 is hitting bottom.  So far, I think the most certain way to take advantage of that bottom would be to have extra cash ready like BRK is holding.   With alternatives, I like oil stocks the most for having some probability of hitting peak during S&P 500 bottom and doing ok also for low-inflation scenario.  Gold is another possibility but I don't have conviction on that to do well also in the medium term possibility of us not hitting ultra-high inflation as currently it is trading at a price that doesn't have much downturn protection - best time to buy Gold protection to hold might have been to buy GLDM/GLD/IAU when gold was hitting bottom, or buy gold producers with lowest cost (sub-1000 cost/oz) when gold was trading below $1200. TLT put options would have to be timed perfectly to work well also - not high certainty scenario to get that timing prediction perfect.

 

Any other ideas that will be high when S&P500 will bottom in event of high inflation, but will also not go down in case of low inflation?  Looks like the only way to be certain to be ready for that bottom is to have some dry powder ready like BRK?

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37 minutes ago, Spekulatius said:

Reits are very sensitive to credit market conditions. That means that once there is some sort of a hiccup in the financial system, Reits are going south in a hurry.

 

I agree if interest rates hit 10%, REITS without 30-year mortgages will go down, and also CAP rates will track interest rates, lowering valuation of CRE.

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44 minutes ago, Spekulatius said:

Crude is not a good inflation hedge because it’s is highly sensitive to marginal demand/ supply imbalances. The changes in crude prices in the past decade had very little to do with inflation.

 

I agree Crude is not a perfect inflation hedge also.  That said if someone bought oil stocks at the bottom, those stocks could benefit from positive surprises from unexpected "bottlenecks".

 

Also, on average, the price for crude will be determined by marginal cost of production of crude needed. So, if you could buy a producer that can produce below that cost, and buy at a time when crude was trading below that cost, it should work out ok during inflation as inflation should cause that marginal cost of production in general to go up and thus price of crude to go up. 

 

That said, I agree with you that unlike 1970s, oil and those oil stocks might not necessarily hit peak with high certainty this time when S&P 500 is hitting bottom due to inflation/interest rates.

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Also, on average, the price for crude will be determined by marginal cost of production of crude needed.

 

Since inflation is a monetary issue - that is, dealing with the supply/demand curve of fiat money, I think what one is looking for in an inflation hedge is stability.  In other words, something that is more stable in its supply/demand curve than money.  Something that can act like a ruler or measuring stick vs fiat.

 

So the best "thing" that defines this measuring stick is not, IMHO, marginal cost of production.  Its is a very low production/inventory ratio.   Oil doesn't have this characteristic - annual production is many factors bigger than above ground inventory which makes oil much more volatile than fiat currency.  Sure the outlook for the price for oil may look promising (in terms of higher future prices) - but I think that has more to do with oil's demand and supply curve than anything monetary in nature.  

 

A price increase does not necessarily mean inflation.  It could just be a price increase.

 

Think of it this way.   Every commodity price signal is basically telling you about two demand/supply curves - first about the supply/demand of the commodity and second about the supply/demand of money.  Thus, the price of oil = (demand for oil/supply for oil) x (supply of $/demand for $).   If demand for oil is going up just as the supply is going down - the oil price will go up.  But if the supply of $ is going down while the demand for dollars is going up - that will drive all things down in price.

 

So things like oil with very high production/low inventory at any given time will tend to fluctuate a lot based on the first factor and less about the second.   Oil may indeed be going up - but its probably not due to inflation.

 

Now gold is different.  It is incredibly stable.   Marginal cost of production for gold isn't a factor here.  The main factor is that annual production vs above ground inventory of gold is around 1.5% or so.   That makes the supply/demand curve for gold almost perfectly stable.  If all global mine production was shutdown for a year - it wouldn't matter much to the price of gold.  But if global oil production were shut down for a year - it would matter a whole lot to the price of oil.

 

So back to the two factors that determine the price of a thing.  In gold's case - very little about its price is determined by its supply demand curve (first factor) and thus in reality gold's price is mostly about the real-time supply/demand curve of $.  This makes gold a sort of measuring stick.  This is what bitcoin is trying to do - ape gold by growing the number of bitcoins at 2% a year until a max number is reached.  

 

So why gold now?  In my view its all about the outlook for future US Treasury spending as a % of GDP as well as the possibility of both higher interest rates and taxes (both inflationary - the Fed is irrelevant, IMHO).  In my view, its insurance in case we've crossed the Rubicon.  Like all forms of insurance, its a cost that one pays hoping one never actually has to use the "product".

 

wabuffo

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1 hour ago, wabuffo said:

Also, on average, the price for crude will be determined by marginal cost of production of crude needed.

 

Since inflation is a monetary issue - that is, dealing with the supply/demand curve of fiat money, I think what one is looking for in an inflation hedge is stability.  In other words, something that is more stable in its supply/demand curve than money.  Something that can act like a ruler or measuring stick vs fiat.

 

So the best "thing" that defines this measuring stick is not, IMHO, marginal cost of production.  Its is a very low production/inventory ratio.   Oil doesn't have this characteristic - annual production is many factors bigger than above ground inventory which makes oil much more volatile than fiat currency.  Sure the outlook for the price for oil may look promising (in terms of higher future prices) - but I think that has more to do with oil's demand and supply curve than anything monetary in nature.  

 

A price increase does not necessarily mean inflation.  It could just be a price increase.

 

Think of it this way.   Every commodity price signal is basically telling you about two demand/supply curves - first about the supply/demand of the commodity and second about the supply/demand of money.  Thus, the price of oil = (demand for oil/supply for oil) x (supply of $/demand for $).   If demand for oil is going up just as the supply is going down - the oil price will go up.  But if the supply of $ is going down while the demand for dollars is going up - that will drive all things down in price.

 

So things like oil with very high production/low inventory at any given time will tend to fluctuate a lot based on the first factor and less about the second.   Oil may indeed be going up - but its probably not due to inflation.

 

Now gold is different.  It is incredibly stable.   Marginal cost of production for gold isn't a factor here.  The main factor is that annual production vs above ground inventory of gold is around 1.5% or so.   That makes the supply/demand curve for gold almost perfectly stable.  If all global mine production was shutdown for a year - it wouldn't matter much to the price of gold.  But if global oil production were shut down for a year - it would matter a whole lot to the price of oil.

 

So back to the two factors that determine the price of a thing.  In gold's case - very little about its price is determined by its supply demand curve (first factor) and thus in reality gold's price is mostly about the real-time supply/demand curve of $.  This makes gold a sort of measuring stick.  This is what bitcoin is trying to do - ape gold by growing the number of bitcoins at 2% a year until a max number is reached.  

 

So why gold now?  In my view its all about the outlook for future US Treasury spending as a % of GDP as well as the possibility of both higher interest rates and taxes (both inflationary - the Fed is irrelevant, IMHO).  In my view, its insurance in case we've crossed the Rubicon.  Like all forms of insurance, its a cost that one pays hoping one never actually has to use the "product".

 

wabuffo

 

Thanks @wabuffo.  After BRK bought GOLD, I've been slowly warming up to the idea that having small amount of gold exposure might not be bad insurance to have as long as it is bought at a low enough price. 

 

I think one other factor we need to add above in determining price of a commodity is the speculation factor.   

 

Beyond price, I think we also need to look at what is the lowest price this commodity will trade at given its real needs, to figure out how much downside risk we are taking by buying it at a given price.

 

Regarding stability, if products/services in the world were priced in gold, like oil was effectively priced in gold before 1970s inflation, we could have relied on gold's stability more.   In today's world, if one wants to be prepared for S&P 500 bottom with very high certainty, wonder if cash might be more stable than gold. 

 

 

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LM, I think holding cash to prepare for inflation implies too much certainly.  You are assuming inflation is imminent, that it will be strong and that stock prices will collapse.  What if inflation just hovers in the 3-4% range for years. The fed could take it's time raising rates in that environment. It doesn't seem like many other central banks are in a rush.

 

I would argue inflation in the early 80s started 15 years prior, we could be on the same path. It's a long time to hold cash.

 

It certainly makes sense that prices of equities go down in real terms but i couldn't guarantee they go down nominally. Again there are a lot of factors at work and it depends on the time frame and how high rates go.

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@wabuffo succinctly explained the case for gold, imo. Miners could be better, but traditionally, mining stocks / even gold mining stocks) also get whacked badly in a Stock market downturn, so as a hedging instrument, they may not work well at all.

 

Holding cash in the 70‘s was not so bad, because savings accounts and short term bonds/ treasuries were actually yielding something. You still lost purchasing power as the yields didn’t keep up with rising inflation, but it wasn’t a catastrophic loss, I think

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Oil as the inflation hedge makes a great deal of sense over the short-medium term.

All else equal, as inflation devalues the USD, the USD denominated oil price rises. You also have the strong likelihood of incremental demand outstripping incremental supply for at least 12-18 months. 18 months out - simply change the hedge instrument to something more appropriate, if inflation is even still a problem.  

 

SD

 

 

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4 hours ago, no_free_lunch said:

LM, I think holding cash to prepare for inflation implies too much certainly.  You are assuming inflation is imminent, that it will be strong and that stock prices will collapse.  What if inflation just hovers in the 3-4% range for years. The fed could take it's time raising rates in that environment. It doesn't seem like many other central banks are in a rush.

 

@no_free_lunch, I agree imminent inflation is not a 100% certain scenario, and thus you shouldn't hold 100% cash.  The amount of cash or gold you hold should be based on what probability you think will holding that result in a win (p), how much is the expected increase in your investment (b), probability of your loss (q), and how much is the expected decrease in your investment (a), i.e. the Kelly Criterion, i.e. p/a - q/b.  In the simplest form for even bets where a=b=1, that percentage weight reduces to p-q. 

 

Overall, here are the possibilities we're discussing:

  • Scenario 1. Mild inflation in 3-4% range for 5 years (p1 =35%?) 
    • Stocks with pricing power and long-term duration debt bought at a reasonable price do ok with high certainty (Probability p1s = high)
    • Oil does ok in medium term with high certainty if bought at bottom last year (p1o = high)
    • Cash loses 16% to 22% value with high certainty over 5 years (p1cashWin= low, p1CashLoss = high;  Amount of loss = 16-22%)
    • Gold: cannot say with certainty what happens - could go down as low as what makes miners unprofitable like the bottoms it has hit in the past and gold could lose money (p1gLoss = Medium). Low certainty that Gold does well (p1gWin = low). 
  • Scenario 2. High inflation in 5-10% or higher range at some points in the next 5 years (p2= 65%?)
    • High quality stocks with pricing power and long-term duration low debt with stock price that assumes high discount rate do ok over 5 years (p2shqrp = high certainty) but may dip and provide buying opportunities (p2shqrpCashWin = medium certainty event)
    • High quality stocks whose price assumes low discount rate or have earnings way in the future, low quality stocks with short-term debt or high debt or without pricing power suffer badly and indexes provide great buying opportunities to buy with CASH and hold (p2sCashWin = high certainty event)
    • Oil does well in medium term (p2oWin = high certainty)
    • Gold: Might spike if retail investors get on the bandwagon (p2gWin = 60-70% range but not high certainty; however, amount of win could be high)

 

To summarize,

  • Gold: In high-inflation scenario, gold does well, but only with medium certainty, albeit high amount win.  In low inflation scenario, gold could possibly lose a lot.
  • Cash: In high-inflation scenario, cash does well also, and that too with high certainty to give opportunity to buy indexes. In low inflation scenario, loss is bound with high certainty.

 

 

Thoughts on probabilities above? 

 

 

 

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33 minutes ago, LearningMachine said:

 

@no_free_lunch, I agree imminent inflation is not a 100% certain scenario, and thus you shouldn't hold 100% cash. 

 

Overall, here are the possibilities we're discussing:

  • Scenario 1. Mild inflation in 3-4% range for 5 years (p1 =35%?) 
  • Scenario 2. High inflation in 5-10% or higher range at some points in the next 5 years (p2= 65%?)

 

To summarize,

  • Gold: In high-inflation scenario, gold does well, but only with medium certainty, albeit high amount win.  In low inflation scenario, gold could possibly lose a lot.
  • Cash: In high-inflation scenario, cash does well also, and that too with high certainty to give opportunity to buy indexes. In low inflation scenario, loss is bound with high certainty.

 

 

Thoughts on probabilities above? 

 

 

We technically have 5% inflation today, it's a done deal.  So i would make a modification to your equation that you need to have sustained inflation at your given range levels.   My hunch is quite different, I would put p1=50%, p2=20%, p3=30% where p3 is below 3% inflation.

 

Don't get me wrong, I actually do hold cash as well. I just do it for different reasons, for these probabilities above and due to the fact that I feel the markets could crash for all sorts of reasons.

 

On inflation, I was looking at commodities and quite a few have stepped back.  Lumber is down almost 50%, steel is down, oil pulled back a touch.   It seems very predictable that you will get some inflation given pent up demand and low levels of production but I feel that the market will solve this and we will move back to surplus in most commodities.  The only one that concerns me is oil, just due to the low levels of drilling , environmental laws, ESG investing, return to growth, etc .  I can see SDs point that if there is inflation it's probably oil that will cause it.  Outside of some oil spike pushing on inflation, I just find it hard to believe.

 

The way I look at it, the total value of all stocks, real estate and other hard assets in the US has to be somewhere north of $150t right now.  If the US government prints $2t a year, isn't that just an extra 1.5% or so relative to the total assets?   That doesn't even take into account non hard assets like debt, I just don't know how to factor those in but they must absorb some of the increased spending right?   Based on these numbers,  i don't see why current deficits lead to huge , and on going surges in price levels.

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Cash: In high-inflation scenario, cash does well also, and that too with high certainty to give opportunity to buy indexes. In low inflation scenario, loss is bound with high certainty.

 

Actually - what you want in a high-inflation is negative cash (ie, fixed-rate long-term debt - preferably taken out at low rates before the high inflation starts).   In real-terms, part of your principal gets paid down by inflation.

 

Of course, none of this is a prediction that high inflation is probable or even possible as a scenario.  My comment is just a what-if observation.

 

wabuffo

 

 

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22 minutes ago, wabuffo said:

Cash: In high-inflation scenario, cash does well also, and that too with high certainty to give opportunity to buy indexes. In low inflation scenario, loss is bound with high certainty.

 

Actually - what you want in a high-inflation is negative cash (ie, fixed-rate long-term debt - preferably taken out before the high inflation starts).  

 

wabuffo

 

 

Of course, you want cash taken out at low long-term interest rates, and in the long run that should do fine.

 

I'm talking about how you invest that cash, some of which is taken out at low long-term interest rates.  You could either just put it all in long-term holdings that will do well over the long run, or save some for taking opportunities that might arrive. 

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