excerpts
- Denominators allow us to assign meaning to price.
- Adjusting prices for inflation, purchasing power, and a stable unit of measurement is the topic at hand.
- One of the most challenging financial concepts to truly understand is the real return of a given asset.
- the relatively contained monthly inflation rates, most often between 0 and 1%, adding up to a significant rise in overall prices of nearly 1,600% since 1940.
- In Zimbabwe, for the 12 month period ending in June 2008, the Stock Exchange Industrial Index went from 15,000 to just under 6,000,000,000,000 and continued rising to more than 9,688,095,700,000 by October, a gain of more than 538,000,000%!
- The fact that denominators matter does not tell us which ones we should pay attention to and what they are telling us.
- Gains made on the back of a depreciating unit of measurement are ultimately unsustainable or result in little true wealth creation for investors who earn, save, invest, and spend in that currency.
- This means any additional gains in the market carry heightened risk
- Current politics suggest that a highly interventionist policy will continue.
- However, we must also give weight to the possibility of a truly deflationary environment taking hold.
- With the tug of war between inflationary policies and deflationary structural forces, a combination of nominal and real price declines seems plausible.
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