Thread by @biancoresearch

What Does Inflation Mean?

After going almost a generation without meaningful inflation, many believe it has been vanquished. Aging demographics, globalization, and advancing technology have held prices down. Will this remain true in 2021?

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In the late 60s, many believed stocks were the perfect hedge against inflation. This line of thinking argued companies could raise prices along with costs, providing a barrier from inflation. This thinking is again present today. But this did not hold true in the 70s.

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Below is the inflation-adjusted SPX (orange) and DJIA (blue) from 1958 to 1995.

From the 1968 peak to the 1982 low, the S&P 500 lost 65% of its inflation-adjusted value. It was not until 1993 that the inflation-adjusted SPX exceeded its 1968 peak! 1995 for the DJIA!

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For almost 30 yrs equities lost purchasing power for its holders.

Inflation took a tremendous toll on these investors in the 70s and 80s.

People at the time were painfully aware of how inflation was destroying value, as captured by this famous Aug 12, 1979 BW cover.

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Yes, the timing of the cover was contrarian, as it came near the end of the long inflation period. But the point was correct. Inflation can destroy stock investors.

Should inflation return in 2021 (our bet), don't fall for revisionist history that it is good for equities.

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