1/ US Inflation and Global Asset Returns (Dai, Medhat)

"While average real returns were lower in years with higher inflation for most assets, many of the differences are not statistically reliable, especially among non-bond assets & in more recent times."
papers.ssrn.com/sol3/papers.cf… Image
2/ "Our conclusion that most asset classes have limited inflation-hedging abilities is consistent with the literature. Bodie (1976), Fama & Schwert (1977), & Fama (1981), among others, find that nominal stock returns are negatively related to expected & unexpected U.S. inflation. Image
3/ "Gultekin (1983) & Beckers (1991), among others, find similar evidence outside the US. Fama & Schwert (1977) also find (i) that nominal returns to government bonds and bills are only positively related to expected inflation and
4/ "(ii) that while nominal private residential real-estate returns are positively related to both expected and unexpected inflation, more than 40% of their variance is left unexplained by the two components of inflation.
5/ "Bekaert and Wang (2010) find limited inflation-hedging abilities for bonds, stocks, real estate, and gold across 45 countries."
6/ "Returns are in U.S. dollars.

"We use a sample’s median inflation to classify low- & high-inflation years. US inflation has been benign over 1991–2020 vs. 1927–1990, which featured deflation (the Great Depression, 1929-1933) as well as double-digit inflation (1940s & 1970s)." Image
7/ "All but one asset had positive average real returns in both low- and high-inflation years.

"Most assets had lower avg real returns in high-inflation years. The only positive differences are for energy stocks and the value factor, although neither is statistically reliable. Image
8/ "Exhibit 3 repeats the analysis for the most recent 30-year period (1991–2020), which expands the number of assets we study to a total of 30.

"None of the reliably negative differences observed over the long sample in Exhibit 2 remain reliable over the most recent 30 years." Image
9/ "Energy stocks and commodities have been much more volatile than inflation in our sample, which casts doubts about their ability to serve as an effective hedge against inflation.
10/ "For example, over 1991– 2020, the standard deviation of inflation was 0.90% per year while the standard deviations of the nominal returns to energy stocks and commodities were 19.02% and 17.52% per year, respectively, or around 20 times as large for either asset."
11/ "Since expected inflation is embedded in asset prices, it is unexpected inflation that erodes real asset values.

"The time-series correlation between actual & expected inflation is 0.66 (t-stat 7.44). Unexpected inflation's σ is 2.75% (1.09%) over 1947–1990 (1991–2020)." Image
12/ "The few reliable coefficients and negligible explanatory power means that observed inflation rates—or even perfect foresight of inflation—told investors little about returns.

"Larger coefficients are not necessarily better, as they can be driven by high return volatility." ImageImage
13/ "For T-bills, the comovement with inflation (especially unexpected inflation) is an appealing attribute for inflation hedging, but investors should keep in mind that T-bills on average delivered low returns that barely kept up with inflation (Exhibits 2 and 3).
14/ "Though energy stocks and commodities showed meaningful co-movement with inflation, it is important not to overlook that more than half of the nominal-return variation was unrelated to inflation. Their nominal returns were roughly 20x as volatile as inflation over 1991-2020." Image
15/ "Inflation is just one of many aspects to consider for asset allocation. The right mix for growth and hedging purposes ultimately depends on an investor’s goals. The good news is that most of the global assets we study were able to outpace US inflation over the long term."
16/ Rate of Return on Everything


Commodity Futures Risk Premium


Getting to the Core: Inflation Risks Within & Across Asset Classes


Mapping Investable Return Sources to Macro Env.
17/ Best Strategies for Inflationary Times

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More from @ReformedTrader

28 Sep
1/ Robust Beauty of Improper Linear Models in Decision-Making (Dawes)

"Even improper linear models are superior to clinical intuition when predicting a numerical criterion from numerical predictors. In fact, unit (i.e., equal) weighting is quite robust."

uwe-mortensen.de/DawesRobustBea… Image
2/ "In proper linear models, predictor variables are weighted such that the resulting linear composite optimally predicts some criterion of interest; examples of proper linear models are standard regression analysis, discriminant function analysis, and ridge regression analysis.
3/ "Research summarized in Paul Meehl's book on clinical vs. statistical prediction—and a plethora of research—indicate that when a numerical criterion (e.g., graduate GPA) is to be predicted from numerical predictor variables, proper linear models outperform clinical intuition.
Read 13 tweets
27 Sep
A few real estate investors made a lot of money in 2009 and 2010, but they didn't do it because prices rebounded quickly from a low. (In the U.S., prices peaked in 2005 and went into a six-year downtrend.)

They did it by buying houses at large discounts of 30% to 50% + repairs.
There is momentum in real estate like in everything else: trends from last year tend to continue.

But even where we do see mean-reversion (one-month time frames in individual stocks), it takes a portfolio of hundreds of positions to capitalize on this statistically weak effect.
I don't know of any trading strategy that can generate reliable returns by trading a single, individual asset (one stock, one house, etc.) using its past price data.

Real estate investors get around the lack of diversification by getting huge discounts.
Read 18 tweets
24 Sep
1/ Betting Against Quant: Examining the Factor Exposures of Thematic Indices (Blitz)

"Investors in thematic indices trade against quants, who prefer stocks that are currently cheap & profitable. Negative factor exposures imply low expected returns."

papers.ssrn.com/sol3/papers.cf… Image
2/ "Our sample includes all S&P and MSCI thematic indices with at least 3 years of data as of end April 2021.

"Our conclusions should not be generalized to thematic investing in general, since our analysis is exclusively based on data from two index providers." ImageImage
3/ "The history has backfilled data, as the first S&P thematic indices were launched in 2016; MSCI indices were launched as recently as 2020. Backfilled returns are probably biased upwards (e.g. survivorship bias), but this is less of a concern for estimating factor exposures."
Read 12 tweets
23 Sep
Return Stacking: Strategies for Overcoming a Low Return Environment (@RodGordilloP, @choffstein, @GestaltU)

"We describe a way to stack returns by choosing alternative fund managers already engaging in non-correlated, capital-efficient strategies."

info.rcmalternatives.com/return-stacking ImageImageImageImage
"How do you endure the ‘line item risk’ of alternatives? How do you participate in the upside of an increasingly overvalued stock market? What value do bonds bring at the zero bound? The answer boils down to some new capital-efficient ETFs & mutual funds."
podcasts.apple.com/us/podcast/res…
Read 5 tweets
9 Sep
1/ Explaining the Recent Failure of Value Investing (Lev, Srivastava)

"We identify two reasons for the failure of value investing: (1) accounting deficiencies and (2) fundamental economic developments which slowed down mean reversion of value & glamour."

papers.ssrn.com/sol3/papers.cf… Image
2/ "The value strategy had already lost much of its potency in the late 1980s and yielded negative returns in the 1990s, barring a brief resurgence in 2000-2006.

"The expensing of intangibles started to have a major effect on book values and earnings in the late 1980s." ImageImage
3/ "The effect of our intangibles book-value adjustments are more pronounced for glamour than for value stocks. Among glamour stocks, our adjustments had a larger effect on small than large companies, since small, high-growth glamour firms tend to invest heavily in intangibles." ImageImageImageImage
Read 10 tweets
4 Sep
1/ Is U.S. housing in a bubble?

TLDR: Maybe. Valuations are consistent with this, especially considering real yields, but borrowers are also in better shape than in 2006.

Maybe build a one-sheet Excel model for expected housing returns and decide for yourself.

Thread
2/ Most of the realtors I've talked to tell me that the housing market is even hotter than in 2005, at least when metrics like months of inventory, days on market, and rapid price increases are concerned.

3/ Where I live, houses are on the market for <20 days on average, and buyers pay an average of 10% above asking and waive their inspection contingencies. Some are coming in with all cash.

Inventory (valuation) matters a lot in the short (long) term.

Read 16 tweets

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