STOCK AND INFLATION

Stock And Inflation



Stock And Inflation

Introduction

Inflation, a pernicious stealth tax on purchasing power surreptitiously levied by immoral governments, is one of the greatest persistent obstacles to serious wealth generation.

By creating fiat money out of thin air and spending it today, governments increase the amount of money in circulation. The larger the money supply grows, (Arin & Mamun 2004:1)the more dollars bid on and compete for goods and services driving up general prices.

Discussion

These rising prices reduce the purchasing power of investors' scarce capital, effectively expropriating it through a dishonorable “tax” that not 1 in 50 people truly understand.But sadly mainstream stock investors are seldom if ever exposed to inflation-adjusted studies on the stock markets. Whenever Wall Street talks about secular gains, like in the Great Bull Market from 1982 to 2000, nominal stock-index numbers are used. If an investor earns 100% over years but general price levels rise 50% over this same time, half of the investor's perceived gain is nothing but an illusion. (Paudyal 2001:23) Nominal numbers over long timespans are meaningless as investors seek to multiply capital in order to ultimately spend it on actual goods and services some day. True gains are only relevant in terms of their impact on raw purchasing power. Stock investors really need to take this to heart. In order to analyze the impact of inflation on stock investors, we did some research work on the mighty S&P 500 this week. The S&P 500, of course, is the flagship UK stock index that represents the preeminent publicly traded corporations in America. It is the best proxy for the UK stock markets as a whole and it yields the benchmark returns by which all other investments and even portfolio managers are measured. (Arin & Mamun 2004:1)

Using monthly data since 1950, we overlaid the usual nominal S&P 500 with a real S&P 500 adjusted for inflation. The UK Consumer Price Index was used for computing the monthly inflation adjustments, which is extremely conservative.

The CPI is intentionally lowballed to understate inflation for political reasons since inflationary expectations are so dangerous for the financial markets. Indeed even Alan Greenspan has said many times that the Fed fears the rise of inflationary expectations even more than inflation itself since the mere expectation of inflation radically alters global capital flows and buying patterns in stocks and bonds. (Paudyal 2001:29)

In addition, non-discretionary government expenses like pensions are ...