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Jim correctly pointed out that Berkshire Hathaway is a proxy for the US economy and therefore is likely to suffer the same fate.

It has also been pointed out that, especially with the current tax cuts outweighing the income from tariffs at the same time as the tariffs. etc. are stifling the grown oof the economy, that there is about zero chance we can significantly reduce the size of our massive (and growing) deficit.

The only solution would appear to be massive inflation of the USD - something which has to be apparent to the Secretary of the Treasury et al. Pleas/threats from the President for the Fed to lower interest rates would play into this. While the US equity prices might rise, it would be in terms of inflated dollars - which would frankly make it difficult to determine if investors were winning or losing.

At the beginning of the year, the US dollar index was about 110. It is now about 98 - or a decline of about 11%. While it’s easy to get enthusiastic about your stock portfolio going up, it's sobering to realize that that increase is muted in terms of your global purchasing ability.

I fear this is only the beginning of a multi-year policy to address the huge debt by reducing the value of the currency itself. Those in the population who own fungible assets such as real estate, equities, gold, cryptocurrency (perish the thought) and so on will see those assets rise in nominal terms, but those who depend on their savings (or non-inflation protected bonds) for their future nestegg will be holding a bag of greenbacks with an ever-diminishing value.

Jeff

You have described stagflation. We have already lived through this in the late 1970s.

Inflation soared as the economy slowed. (To see the rate of change click on the blue Edit Graph button in the upper right-hand corner.)

https://fred.stlouisfed.org/series/CPIAUCSL

https://www.statista.com/statistics/1404145/us-dol...

The USD Index fell from 106 in 1976 to 85 in December 1979.


Then Fed Chair Paul Volcker cranked up the fed funds rate and precipitated the harsh 1980 - 82 recession.

https://fred.stlouisfed.org/series/FEDFUNDS

Don't call equities "fungible" since the stock market drops during a recession while a house will still be a house even if its price drops. (It can be exchanged for another house at the same price.)

Here is a historical chart of SPX which can be seen both nominal and inflation-adjusted. The inflation-adjusted SPX plunged between 1970 and 1980 during the Guns'N'Butter era of government spending on both the Vietnam war and the war on poverty plus the start of Medicare in 1965.

https://www.multpl.com/s-p-500-historical-prices

I remember buying Hershey bars for a nickel and a slice of pizza for 15 cents.

Remember that consumer price inflation happens when the money in the hands of consumers grows faster than the consumer goods and services they are buying. (Increasing QE at the Federal Reserve doesn't get into consumer hands but increases asset prices.) The nonpartisan CBO describes a tsunami of government deficits.
https://www.cbo.gov/publication/60870

I agree with your conclusion. Except that the government may understate inflation (which would reduce the income from inflation-protected bonds). And stocks will not hold their value if the bubble bursts and/or there is a recession.
Wendy

The only solution would appear to be massive inflation of the USD - something which has to be apparent to the Secretary of the Treasury et al. Pleas/threats from the President for the Fed to lower interest rates would play into this. While the US equity prices might rise, it would be in terms of inflated dollars - which would frankly make it difficult to determine if investors were winning or losing.

I wouldn't frame it as the solution. I view it more as the likely outcome, as there are far better solutions. As we all know, government deficit spending creates money out of thin air, which can lead to inflation. That policy has been maximized. Plus we have tariffs and onshoring of manufacturing which will increase prices, on top of that we have limits on immigration...all that is not good, when it comes to inflation. I think there will be some inflation baked in no matter what happens in future elections. On top of that, the stock market is at extreme valuations by any objective measure.

Way back in 1977, Warren Buffett wrote a great article in Fortune called "How Inflation Swindles the Equity Investor."

http://csinvesting.org/wp-content/uploads/2017/04/...

I highly recommend people who are concerned with investing and inflation read the whole thing. But in summary, Buffett essentially says equity investors can't beat high rates of inflation. I trust him on this one. He sounds like he knows what he is doing. I predict big things for him. And again, by any reasonable measure, we should expect lower than average equity returns going forward, and that's not counting inflation.

So we have a lot of indicators that officially Don't Look Good™. But trends can change. One thing I observed from watching the "Capital Gang" on CNN back in the day is all these smart people's predictions consisted of simply making a straight line projection of current tends into the future. And they were always wrong, sometimes by the next week. And no one ever called them on it. It worked for them because the show was on for decades, but useless for planning purposes. The only thing I learned from that show was to not make straight line projections. I would have been better off watching "Love Boat" and its message of wildly unrealistic optimism. Still, it might be prudent to identify the nearest exit row including the ones that might be behind you, if you know what I mean.

In the meantime, the prophet Tom Morello has put together a playlist to guide us in these uncertain times:

https://open.spotify.com/playlist/5M4GjeLsxGsK7SPt...

The only solution would appear to be massive inflation of the USD

Jeff,

Inflation de jour

However, the story is that unemployment is expected to rise. We will get deflation.
The only solution is raising corporate taxes to create more reinvestment in the US.

We are watching a dog and pony show putting off the day we raise corporate taxes.

Buffett essentially says equity investors can't beat high rates of inflation.
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Inflation is a dommestic economic artifact and deals with a rate of decline in the nominal purchasing power of the currency - in this case the US dollar.
There are two ways to look at the value of a greeenback. One is the domestic purchasing ability and the other is its value relative to other currencies.

1) A drop in the value of the US dollar will presumably increase the desirability of US-manufactured exports

2) A drop in the US dollar will increase the reported foreign profits of multinational companies based in the US when converted to USD

3) Adrop in the USD, all things remaining equal, will tend to increase the price of foreign stocks when converted into USD.

Those who follow the portfolio of stocks owned by Berkshire Hathaway will notice substantial investments in a bevey of Japanese companies (I picked up three of them a couple of months ago and they are up 12%, 16% and 22% respectivly. In fact, the substantial majority of my current equity portfolio currently consists of foreign companies (many held for years and a fair number held in shares of their native markets in terms of their currencies).

While Buffet is correct when he says equity investors can't beat high rates of inflation, he has placed bets to prove himself wrong (and I admit to have, long-term, taken a similar approach). While some of those bets have under achieved the performance of the US market a bit over the past few years, I suspect all good things come to those with patience.

Jeff

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