Saturday, December 24, 2016

CPI increases harm returns

Measured yield during bouts of 'inflation'.  Investment returns drop when consumer prices rise, MSCI, I think that is Morgan Stanley Return Index. But maybe not, chart from Value Walk.

A rise of 1.5% CPI generally causes recession, and comes after government deficit rising, or in some sequence, semi-repeatable.

Notice the real inflation happened after the Nixon shock, until 1982 or so. That was the real inflation, the Fred currency losses when it decided to horde gold, about a trillion, rather suddenly, and it took ten years to re-price.. That was a loss to the Fed, but the currency passed through the gold bugs.

But, since then, we have few inflationary bouts, and a long term continuing disinflation, until today. Today, we have seen, consumer prices dropping for quite some time, inflation being held up by housing and medical.

In other words, if you considered the double entry accounting system reasonably accurate, then absent currency gain or loss, you would expect pricing to be stable.  Hence, the deflation we see now should continue until prices are back to 1985 levels.  That chart says that any significant jump in CPI and we crash, ultimately losing about 40% if you track back to 1990.  But we may lso bounce prices slowly down, who knows.

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