If we get a hyperinflation, and we could given the Fed’s current predicament, stocks will ultimately be a good investment because they will be selling their products at the inflated prices, paying their costs at those same inflated prices, and reporting profits in those inflated dollars.
If you multiply everything on the income statement and the asset side of the balance sheet by 100, the share price should go up 100 times once things settle back down. And if the company is currently a little debt heavy, that debt becomes easier and easier to pay off besides.
Granted, in the interim things can get a bit messy, but owning a piece of a mutual fund composed of solid companies is a good way to ensure that your investment portfolio participates in a hyperinflation. Owning bonds instead is a good way to ensure that you’re wiped out, by the way.
“If we get a hyperinflation”
This is the part I’m having trouble with. Increasing inflation takes at least two basic elements, Demand and a shortage of supply, based upon true value.
Right now there is no demand side of the equation. There is no incentive to increase workers wages, to support an increase of inflation. The profits made by a lot of the companies during the past 3 years has been at the cost of workers, resulting in increased productivity and higher earnings.
To increase workers wages would put pressure upon profits, because there would be little reward in increasing prices in a weak demand economy. A lot of the US economy is in a deflationary cycle: Housing, which impacts a large number of people.
It seems to me there would have to be a total loss of confidence in the US dollar to trigger high inflation, and I just don’t see that for some time.
Right now we are in a circular cycle, where almost free money in being used, by a limited number of people, who invest in the market driving up prices. There is little risk for them.
Inflation will show up in commodities, which is the true value of the US dollar, but that inflation can’t be matched on the demand side because there just is no sustained increase in real wages. So the average person is left being shorted from both ends.
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“but owning a piece of a mutual fund composed of solid companies is a good way to ensure that your investment portfolio participates in a hyperinflation”
I agree, and will indulge that philosophy further when the market is a little less hot.
I’m investing in good quality companies that pay out a decent dividend and then hold for a long time.