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📉Why #Inflation Triggers A Sell-Off?📉
Today's news that CPI surged 4.2% sent equities and crypto markets to hell. But WHY??
What are the mechanics of how inflation affects equities, and why is tech falling hardest?
Here's a thread on inflation's 1st & 2nd order effects.
👇
Today's news that CPI surged 4.2% sent equities and crypto markets to hell. But WHY??
What are the mechanics of how inflation affects equities, and why is tech falling hardest?
Here's a thread on inflation's 1st & 2nd order effects.
👇
1/ Inflation Lowers the NPV of Money
Say I'll give u $100 in 1yr. How much 💸is that worth today? If every $1 you invest now can earn 3% interest, then it's worth ~$97.
Let's add hypothetical inflation of 2%. Now the real rate is 5%. So your promised $100 is only $95.
Say I'll give u $100 in 1yr. How much 💸is that worth today? If every $1 you invest now can earn 3% interest, then it's worth ~$97.
Let's add hypothetical inflation of 2%. Now the real rate is 5%. So your promised $100 is only $95.
What does lower NPV mean for stock valuations?
If you've done DCFs, you know that the equity value of a company is literally the sum of its cashflows projected out to ♾ then discounted back to today.
Inflation -> higher discount rate -> higher denominator -> lower equity value
If you've done DCFs, you know that the equity value of a company is literally the sum of its cashflows projected out to ♾ then discounted back to today.
Inflation -> higher discount rate -> higher denominator -> lower equity value
