Michael Pond, CFA, delivered an interesting primer on inflation-linked debt at the recent CFA Institute Fixed-Income Management Conference. So what are inflation-linked bonds? They are most typically debts issued by sovereign nations whose nominal interest rate is adjusted, either up or down, by an inflation measure.
If new disinflationary pressures are left unaccounted for, inflation, holding all else equal, will remain subdued, and the pace of rising rates will be slower than was expected by either the market or the Fed.
Is it time to put conversations about inflation risk on the back burner? Questions like this illustrate a major flaw in the way many investors approach protecting their portfolios against inflation risk: Discussion starts only after rising inflation is already a problem and inflation hedges are expensive.
Charlie Munger once said: "In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time — none. Zero. You’d be amazed at how much Warren reads — and how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.”
We may believe that inflation is a relatively new phenomenon, one from the time of the birth of coins and currencies, but for those of us that live in the world of numbers and taxes, the key to the discovery was the term used for the exponential growth of particles that became planets and other objects. That term was "inflation." Thus, the term from the physical world describes a power that keeps growing.
The US generally accepted accounting principles (GAAP) do not require adjustments for inflation, so financial statements are reported in nominal terms. This struck Yaniv Konchitchki as problematic. In his recently published article “Accounting and the Macroeconomy: The Case of Aggregate Price-Level Effects on Individual Stocks,” Konchitchki examines stock-valuation effects of aggregate price-level changes on individual companies.
At the recent CFA Institute India Investment Conference in Mumbai, attendees were presented with two very different perspectives on quantitative easing.
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