There’s a popular saying that stocks climb a wall of worry. But one could also say that bonds also climb a wall of worry. A wall of worry over inflation. For years (really decades), there have been persistent fears of surging inflation. And those fears just never come to fruition. That doesn’t mean they can’t come to fruition in the future, but I do find these comments by Richard Bernstein apt:
“There appears to be a wall of worry with respect to inflation as well. It is unfortunate that investors have listened to politicians because printing money does NOT cause inflation. Economic textbooks say that printing money and using it to create excess credit causes inflation. The US is certainly printing money, but credit creation could hardly be called active let alone excessive. Thus, we view the risk of meaningful inflation as still quite low.
However, investors continue to perceive inflation risk to be very high. Our models currently suggest that investors are pricing nearly 6% inflation over the next twelve months into the valuation of the stock market. As Chart 5 shows, such expectations have nearly always been too pessimistic. The stock market appears to be climbing the inflation wall of worry as well.”
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.