Bonds, Stocks, Inflation

If you look at the 1899 menu of Delmonico’s, the famous New York City restaurant, you will see that you could have had a first-rate dinner at that first-rate establishment for under five dollars! Today, a similar dinner at Delmonico’s would cost you about $130.

An 1899 dollar is worth $27.00 today. Over that period, the average inflation rate was 2.88%. But the time on your job that you would have had to spend in 1899 to buy that dinner is the same as the time on your job that you would have to spend today.  That is, the real cost of that dinner is the same.

With the average inflation rate of 2.88% over the last century, we have prospered more than any comparable period in history.

Now, how would investors react if they earned 5% in a given year and were taxed at 100%?

They would leave the country or start cheating income taxes.  However, suppose that they earned 5% in a given year and were not taxed at all, but inflation was at 5%. The result would be the same. That second scenario has occurred many times in the last 100 years, yet we don’t see investors leaving the country in droves. As a group, investors should account for inflation when monitoring their performance.

How does inflation affect bonds? Bond markets are bigger than the 70 trillion global stock markets.

In the US, certificates of deposit (CDs) are similar to Canada’s guaranteed investment certificates (GICs).

Monday Morning Millionaire Program members also apply the acronym GICs to bonds. In this case, it stands for Guaranteed Instruments of Confiscation, and of course, they are present in all countries. After taxation and inflation, the loss of purchasing power of bonds, that is, negative returns if held to maturity, is the case nearly always. Most Monday Morning Millionaire Program members don’t even know how to spell the word.

Bonds can be useful investments in tax-exempt settings such as university endowments, government pensions and church portfolios. Bond yields are diminished by inflation, of course, but the returns can still be positive if taxation is not a concern.

How does inflation affect stocks?