The Horseman of Inflation

"By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens."- John Maynard Keynes

Here is a summary of what I learnt from the second chapter of William Bernstein's book 'Deep Risk: How History Informs Portfolio Design'

The list does not contain all the key facts from the book only those that were new or interesting to me.

• Curiously only 7 countries have had a combination of high long term equity returns (> 1% real, capital only) and tolerable inflation (<5%): US, Canada, Denmark, Netherlands, Noway, Switzerland and Sweden.
• Brazil had an annual inflation of 148% between 1947 and 1996!
• Severe and persistent inflation seems to reduce equity returns yet it does not always savage them e.g. Chile had 31% annual inflation 1927-1996 (508 million-fold rise in prices....mindboggling!!) but real equity returns were still 2.99% per year.
• Stocks suffer short term to inflation but protect against it in the long term, hence stocks add short term shallow risk but protect wealth over longer periods.
• Bonds in those nations with lowest trailing inflation had the lowest returns, whereas bonds in countries with the highest trailing inflation had the highest returns.
• It is surprises to the upside in inflation that decrease prices and damages bonds. (It is this point that really highlights for me the potential fragility and risks in the current bond market if/when inflation occurs).
• One possible strategy would be to wait a few years after inflation has kicked in and then jump in by buying bonds.
• A well diversified portfolio of international stocks is likely a good hedge against the deep risk of inflation.