LearningMachine

How long do you think it would take for profits to double? If 10% inflation and subsequently 10% risk-free rates really happen, discount rate will have to be more than 10%, i.e. P/E could go below 10 like it did in 1974. So, I should really be asking how long do you think it would take for profits to triple or quadruple given today's Shiller P/E is 37.47 and S&P 500 P/E is 44.88 at https://www.multpl.com/s-p-500-pe-ratio. Any chance we might get opportunities in the years it takes for profits to double, triple or quadruple to get to appropriate P/E for the new inflation rate/interest rate/discount rate?

The article would have been more complete and accurate if it hadn't left M2 out of the picture:

@no_free_lunch, for probabilities, looks like you are saying: p1=50%: Mild inflation in 3-4% range for 5 years p2=20%: High inflation in 5-10% or higher range at some points in the next 5 years p3=30%: Inflation below 3% Let's go further and assume conservatively in the p2=0.2 scenario that gold will go to $3,528 (2x of $1,764), and that in p1+p3 scenario (0.5+0.3=0.8), gold will go down back to around $1200 (68% of $1764). Then, the expected value gold will get to is (0.2 * 2) + (0.8 * 0.68) = 0.4 + 0.544 = 0.944, i.e. 5.6% loss To get to break-even expected return on buying gold with these probabilities, you have to buy Gold at $1600 (so that downside $1200 is only 75% of paid price). If you wanted expected return to be positive on these probabilities, you have to buy Gold below $1600. $1200 purchase price would be ideal because that's the price it stablized before, likely because that's when it started approaching production cost for high-cost miners. I understand this might not be applicable to @wabuffo and @Spekulatius as they believe minimum gold price has nothing to do with marginal cost of production. I think marginal cost of production still matters for gold. I do think if gold production were to shut down completely, e.g. if gold price dropped to $800, jewelry, tech & industrial uses will start to drive price up to restart production unless central banks & investors were selling at that time for those uses.

Inflation expectations are at highest they have been since 2004. So, both (1) monetary supply and (2) inflation expectations criteria are now being met to get inflation going... https://trends.google.com/trends/explore?date=all&geo=US&q=inflation

Here is how I worded my Scenario 2: "High inflation in 5-10% or higher range at some points in the next 5 years (p2= 65%?)" I'm not saying don't buy stocks at all. I'm saying Scenario 2 has a 65% probability of happening, and interest rates have a high likelihood of following at least at some points during five years if that scenario happens, and discount rates have a high likelihood of following if that scenario happens, and that we will likely get some opportunities if that scenario happens.

10% inflation --->10% interest rates ---> 10% cap rates I'm saying 10% inflation should lead to 10% interest rates, which should lead to 10% cap rates. I understand the first arrow hasn't been happening even for 5% inflation because of intervention from Fed, and Fed calling it intermittent. However, I think either Fed will lose credibility or Fed will have to start admitting that it is not intermittent, and interest rates will likely move up.

It impacts a subset, but a big part of the economy that is measured by CPI. It also has downstream effects. Long-long term, I understand it will be mitigated by productivity increases. I'm saying it increases the probability of us seeing high inflation figures within the next few years.

@no_free_lunch, I understood your question, but my point is that even a single-time doubling of minimum wage is drastic, and hence I switched to the comparison between U.S. and Luxembourg. I am not claiming that minimum wage will continue to double all the time. Single-time doubling of minimum wage over 5 years results in 15% sustained inflation over five years in some goods/services. My point is if that 15% figure shows up even once in a wide range of goods/services, it will be drastic.

By cap rate is a function of NOI, I understand you mean cap rate = NOI/Price of CRE. In other words, Price of CRE = NOI / cap rate Value of CRE with $100K NOI with cap rate of 3%= $100K/3% = $3.333 million Let's say inflation hits 10% and NOI goes up 10% to $110K, and interest rates follow, and cap rates follow Value of CRE with $110K NOI with cap rate of 10% = $110K/10% = $1.111 million. I understand things won't be this drastic, but even if they are half as drastic, not great. I understand if you're saying you don't need to refinance or sell during that time, and can ride the inflation and hold, you might do fine. For that, you need long term mortgage. To be balanced, better to have some cash ready to also buy.

Yes, if you go to McDonald's in Luxembourg with high minimum wages, McChicken is more than double compared to U.S. Imagine mass market goods & services doubling in price in the U.S.

Once you start doubling minimum wages, everything starts almost doubling. Goods & services with labor as a big component almost double, e.g. haircuts, nannies, maid service, restaurant meals, construction costs, etc. Mass Goods & services that are consumed by all, where minimum price is determined by what lower-income folks can afford go up, e.g. fast-food prices double over time. Those geographically-bound workers will compete for the same restricted housing supply with a third of their fruits of labor, causing rents for those workers to double over time, unless effective supply increases due to geographically-mobile higher-income folks spreading out to bigger estates, far out water-view, etc., which is a possibility. So, maybe high-density rent doesn't double. Doubling over 5 years is 15% per year inflation. Even it that inflation figure shows up once in five years, it will be deadly.

I think the other source of inflation is minimum wage inflation. Unlike lumber, where increased supply will bring prices back down, we can't decrease wages back down.

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.

@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?

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.