Friday, September 10, 2010

INFLATION: a great insight on it's impact upon equities

hyperinflation - the greatest fallacy of hyperinflation is to assume this creates a dramatic rise in all asset prices.  In a true hyper inflationary environment, if a business has a dramatic decline in revenues (because people have to spend all their money buying bread and milk they can't buy anything else.)  they can't service their debts, as they run out of cash flow and they the creditors take over, wiping out shareholders.

As for inflation, the idea it is great for equities is not supported by the evidence.  Look what is happening in India - profit margins are squeezed by rising cost of materials, and wages. Historically, the boost to share prices comes after inflation has been tamed and rates start to come down.

Overall, I believe the theory that equities are a good inflation hedge to be a fallacy...

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