In today's episode of The Rational Reminder, we tackle the subject of inflation in a twofold manner. Firstly, there are details around how people perceive inflation that often get overlooked, and secondly, these expectations have investment implications that are worth unpacking. Before diving into the main topic, we talk about Colin Bryar's Working Backwards which tracks the role of failure and customer obsession in Amazon's growth path. After getting into this week's news and listener question, we begin the first part of our session on inflation. Some of the main points we make here are that everybody experiences inflation differently, that perceptions of inflation are connected to experience, and that biased inflation estimates can explain household borrowing and investing behaviour. This leads us to part two of our discussion, where we unpack how expected inflation influences asset pricing and the role of unexpected inflation in the performance of stocks and bonds. We attempt to locate other asset classes that can act as inflation hedges, but find that with the tradeoffs and poor correlations involved, it makes the most sense to vouch for a properly diversified portfolio of stocks and bonds with exposure to multiple sources of expected return. So before you base too much of your decision-making on inflation, be sure to consider some of the points we make in today's show.
Key Points From This Episode:
- TV shows, listener feedback, Peloton's stock price, and RRP updates. [0:00:19.2]
- Lessons from Amazon's growth story in this week's book, Working Backwards. [0:07:55.2]
- News: Vanguard's 'High-Conviction Active Funds' and Wealthfront's intention to sell. [0:14:23.1]
- Whether size premium is influenced by a reduction in IPOs and publicly traded companies. [0:17:36.2]
- Main topic: Overlooked aspects of inflation and their implications on investing. [0:23:46.2]
- Metrics from the CPI and how everybody experiences inflation differently. [0:26:36.2]
- How to work out your personal inflation rate and what Ben and Cameron's are. [0:28:07.2]
- Inflation expectations are influenced by inflation experiences. [0:30:43.2]
- Biased inflation estimates can explain household borrowing/investing behaviour. [0:34:03.5]
- The implications of the fact that the CPI doesn't account for substitution. [0:36:07.2]
- Debunking the assumption that those close to retirement are most exposed to inflation. [0:39:13.2]
- How financial assets are priced using discount rates and the effects of unexpected inflation on them. [0:43:36.2]
- The effects of high, low, and expected inflation on stocks and bonds. [0:45:41.2]
- Whether other asset classes than stocks can be inflation hedges. [0:48:15.2]
- The relationship of different commodities to inflation at different periods and regions. [0:53:05.2]
- Questions of status, greed, and decisions in this week's Talking Sense. [0:56:54.2]
