The High-Inflation 1970s vs. The ZIRP 2010s

[barrett]

I saw a post related to this topic yesterday but can't find it now. So, what does everyone think? Better to be an investor in the high-inflation 1970s or the ZIRP 2010s? Let's take it as a given that only real returns matter.

[barrett]

I saw a post related to this topic yesterday but can't find it now. So, what does everyone think? Better to be an investor in the high-inflation 1970s or the ZIRP 2010s? Let's take it as a given that only real returns matter.

With the PP: 13.54% CAGR real former, -0.433% CAGR real latter.

Not sure where your data is from, MG. The PP has had real returns in the 3% to 6% range over time and that hasn't really changed (so far, at least) since ZIRP started in December of 2008.

I just think it's psychologically way easier to be an investor when bonds and cash have decent yields. The S&P dividend yield was over 4% for much of the 1970s. Even if you didn't hold gold in the 1970s, you had money pouring in in nominal terms.

Does anyone on here go far enough back to have had money to invest in the 1970s?

[MachineGhost]

Not sure where your data is from, MG. The PP has had real returns in the 3% to 6% range over time and that hasn't really changed (so far, at least) since ZIRP started in December of 2008.

I just think it's psychologically way easier to be an investor when bonds and cash have decent yields. The S&P dividend yield was over 4% for much of the 1970s. Even if you didn't hold gold in the 1970s, you had money pouring in in nominal terms.

Does anyone on here go far enough back to have had money to invest in the 1970s?

Not sure where I got those values originally but 70's was 5.94% CAGR and 10's so far is 5.75% CAGR.

Its true you didn't get that harmed by inflation in the 70's so long as you avoided FRNs.  I posted elsewhere a long time ago that the working poor only lost something like 28% of their purchasing power.  So long as you invested you came ahead or beat inflation, but obviously you needed to have real assets to deal with the loss of confidence in the government and USD.

[barrett]

Not sure where I got those values originally but 70's was 5.94% CAGR and 10's so far is 5.75% CAGR.

Its true you didn't get that harmed by inflation in the 70's so long as you avoided FRNs.  I posted elsewhere a long time ago that the working poor only lost something like 28% of their purchasing power. So long as you invested you came ahead or beat inflation, but obviously you needed to have real assets to deal with the loss of confidence in the government and USD.

OK, so our numbers now are similar. If you had money to invest, you could spread it around in cash, stocks and bonds and come out OK. By OK, I mean one could have kept up with inflation... but only barely. Gold was the asset that really helped an investor in that decade (yes, I know it was next to impossible to hold for the first few years and '73 & '74 were terrible years for gold-less portfolios, even with all the interest and dividends pouring in). A retiree with, say, $200,000 in assets, could have reasonably generated more than $10,000 in income (using very rough figures here). In other words, a retired investor could live off of income streams from traditional investing.

Owning your own house was probably also key to a good outcome as it was most likely appreciating in value along with inflation. Your housing costs were locked in as an owner but probably rising quickly as a renter.

ZIRP really helped stocks over the first several years of its existence because it left investors with so few options. Companies were able to cut costs after 2008 and did so in a variety of ways. At this point though, companies have squeezed out most of their potential gains from cost cutting. They are largely unable to grow their earnings in absolute terms. With the S&P yield at 2%, ten-year bonds at 2% and cash at nothing the only way to live on income streams is if you have a few million tucked away and choose not to spend as if you had a few million.

I still think there could be some PP or Boglehead gains through rebalancing but are many of us near-retirees really in a situation where we should be annuitizing some of our assets? I know mathjak's feeling in this (at least, I think I do) but are others thinking along the same lines?

This time seems awfully different to me.

[Libertarian666]

I think the low inflation, low nominal returns environment is better.  Capital gains and interest are taxed, whether they're real or not.  Therefore, the real tax rate is much higher in a high inflation environment.

How about high inflation, low nominal returns? That's what we actually have now; they just don't count the things that are going up rapidly, such as college tuition and house prices.

[barrett]

Brisket prices have risen, but gas is really cheap.

It was worth starting this thread just for that tidbit.

[Fred]

My parents retired in the high inflation environment and with my own retirement on the horizon I think I would gladly trade places with them. They were able to sell the only home they ever lived in along with my grandparents property for a huge profit and put it in CD's yielding 18%. Their money quickly doubled into a nest egg big enough to last the rest of their lives, although my mother is still alive and it's dwindling now with zero return.

If they had been more savvy they could have locked in their money at 14% with LT's for almost the their rest of their lives.

I definitely wouldn't mind having options like that right now.

[barrett]

My parents retired in the high inflation environment and with my own retirement on the horizon I think I would gladly trade places with them. They were able to sell the only home they ever lived in along with my grandparents property for a huge profit and put it in CD's yielding 18%...

They would, of course, have had to still live somewhere though. Much of the advantage in a situation like that comes from downsizing or moving to a lower COL area.

Do you remember how long they were able to lock in those 18% CD rates??? Must have been in 1981, right? I just barely had a bit of money to invest that year and threw it in a money market fund that was yielding about that much. I remember thinking what a great "deal" I was getting. I had no idea how tough that high-inflation period was for a lot of people.

[Libertarian666]

My parents retired in the high inflation environment and with my own retirement on the horizon I think I would gladly trade places with them. They were able to sell the only home they ever lived in along with my grandparents property for a huge profit and put it in CD's yielding 18%. Their money quickly doubled into a nest egg big enough to last the rest of their lives, although my mother is still alive and it's dwindling now with zero return.

If they had been more savvy they could have locked in their money at 14% with LT's for almost the their rest of their lives.

I definitely wouldn't mind having options like that right now.

And if the inflation had continued rising as it had been, they would have been very unhappy with those rates.

[barrett]

My parents retired in the high inflation environment and with my own retirement on the horizon I think I would gladly trade places with them. They were able to sell the only home they ever lived in along with my grandparents property for a huge profit and put it in CD's yielding 18%. Their money quickly doubled into a nest egg big enough to last the rest of their lives, although my mother is still alive and it's dwindling now with zero return.

If they had been more savvy they could have locked in their money at 14% with LT's for almost the their rest of their lives.

I definitely wouldn't mind having options like that right now.

And if the inflation had continued rising as it had been, they would have been very unhappy with those rates.

True. Right now it's hard to imagine (for most of us, that is) that locking in your money at 18% isn't a slam dunk. We've just all gotten numbed by rates being at zero.

Don't know how good these numbers are but check it out:

http://www.usinflationcalculator.com/in ... ion-rates/

From December of 1978 through March of 1980, inflation rose from 7.6% annualized to 14.8%. So it doubled in 15 months. Another doubling would have put it at 30%. Only 18%? What?

[Fred]

My parents retired in the high inflation environment and with my own retirement on the horizon I think I would gladly trade places with them. They were able to sell the only home they ever lived in along with my grandparents property for a huge profit and put it in CD's yielding 18%...

They would, of course, have had to still live somewhere though. Much of the advantage in a situation like that comes from downsizing or moving to a lower COL area.

Do you remember how long they were able to lock in those 18% CD rates??? Must have been in 1981, right? I just barely had a bit of money to invest that year and threw it in a money market fund that was yielding about that much. I remember thinking what a great "deal" I was getting. I had no idea how tough that high-inflation period was for a lot of people.

1981 sounds about right. I don't know how long the interest rates lasted but they started out with a single-wide mobile home in Florida, then upgraded to a double-wide, then to a condo both in Florida and Ohio so they must have done pretty well on interest rates for a while since they always kept all their money in CD's.

On the other end of the spectrum I was selling a house in Ohio and moving to Florida at the same time. The house was almost impossible to sell because of the interest rates and when I finally did the only thing I could afford to buy was a double-wide at a 19.5% interest rate.

[MachineGhost]

OK, so our numbers now are similar. If you had money to invest, you could spread it around in cash, stocks and bonds and come out OK. By OK, I mean one could have kept up with inflation... but only barely. Gold was the asset that really helped an investor in that decade (yes, I know it was next to impossible to hold for the first few years and '73 & '74 were terrible years for gold-less portfolios, even with all the interest and dividends pouring in). A retiree with, say, $200,000 in assets, could have reasonably generated more than $10,000 in income (using very rough figures here). In other words, a retired investor could live off of income streams from traditional investing.

There was plenty of Pre-1965 junk silver coins and Morgan/Peace silver dollars being hoarded (and gold held offshore, but I digress), as well as real estate, land, etc..  People aren't stupid deers in headlights as gold bug doom porners would have you believe. 

I do always advise diversifying the real asset allocation to more than just gold.  Include other value-dense assets like Charmin Sensitive toilet paper and even a bit of Bitcoin.  It's your backup plan; its too risky if political winds shift and your backup is left without a backup.  Salut!

[MachineGhost]

I think the low inflation, low nominal returns environment is better.  Capital gains and interest are taxed, whether they're real or not.  Therefore, the real tax rate is much higher in a high inflation environment.

Tax rates are linked to inflation now.  They weren't in the 70's, however.

[barrett]

Will we all be kicking ourselves in 20 years for not loading up on EE Bonds that are guaranteed to double in that amount of time?

[MachineGhost]

Will we all be kicking ourselves in 20 years for not loading up on EE Bonds that are guaranteed to double in that amount of time?

Only if we go the way of Japan.  But I think they're liable to implode first and we'll luckily avoid it.

[Xan]

I think the low inflation, low nominal returns environment is better.  Capital gains and interest are taxed, whether they're real or not.  Therefore, the real tax rate is much higher in a high inflation environment.

Tax rates are linked to inflation now.  They weren't in the 70's, however.

I think what Desert is saying is that in an environment with 15% interest and your investments kicking off 15% a year, you are treading water, but then get dragged down by being taxed an your 15% of "growth".  In a 0% interest, 0% return environment, you are also treading water, but you're paying nothing in taxes.