One of the more annoying type of people you have to deal with in wealth management (at least in my view) are the people who constantly worry about inflation. Don’t get me wrong, inflation is a dangerous thing, and we absolutely need to make sure it remains low and stable because if it gets out of control like in the last two years, it becomes a severe problem for the economy, jobs, etc. But worrying about inflation can go too far and with many wealthy individuals it does.
I cannot tell you how often I had to listen to men moaning and groaning about how the vast amounts of government debt will lead to an inflation catastrophe (no, it won’t as I explain here) or how all that money printing will inevitably lead to runaway inflation (no it won’t as I explain here and in about half a dozen other posts). I understand that this fear of inflation is driven to a large extent by lifetime experiences of inflation, which is why the people who are paranoid about inflation tend to be overwhelmingly white middle-aged men. These guys have been traumatised by the runaway inflation of the 1970s and will never forget that.
But in my experience, there are two characteristics that make it more likely that the person is paranoid about inflation. One, Swiss are particularly paranoid in my view. Even today, they worry about runaway inflation, because inflation is currently… checks notes… 1.0%. I cannot tell you how annoying this Swiss obsession with inflation is, particularly given that Switzerland doesn’t have inflation and hasn’t had double-digit inflation in my lifetime. And I am… checks passport… a white middle-aged man.
The other characteristic that makes people more paranoid about inflation is if they are heavily invested in real assets like real estate or stocks. Let’s ignore for now that it is a myth that stocks are a good inflation hedge (they only are for inflation rates below c.4%) because what matters is that some people buy stocks because they are supposedly a real asset.
This link between being paranoid about inflation and investing in real assets is clearly not accidental, as Geng Li and Nitish Ramjan Sinha from the Federal Reserve show for US investors. They demonstrate that – ironically – people who own real estate and stocks are more afraid of inflation.
That may simply be a cause-and-effect problem. People who are more afraid of inflation want to protect themselves and thus invest more in real assets. But what seems to be going on here is something slightly different. Some people might be just as afraid of inflation and have similar expectations of inflation going forward as these real asset investors, yet they still hold fewer real estate and stocks.
Instead, what seems to matter is how sure people are about their expectation of future inflation and how much they let that expectation influence their behaviour. Investors who own more real assets have on average higher conviction in their views about future inflation. People who are more uncertain about future inflation tend to hold fewer real assets even if they expect inflation to rise. Furthermore, investors who own more real assets tend to have more stable inflation expectations, which is another way of saying they are always expecting inflation to be high and are sure it will happen this time. A clear case of ‘often wrong, never in doubt’, if you ask me.
But if people are sure that inflation will rise in the future no matter the realities in the ground, they can invest as much in real assets as they like, they will never feel secure. Their fear of rising inflation has become part of their identity and nothing will ever convince them that these worries are overblown.
This is a bit of a suprise to me. I thought it was foremost Stupid German Money that was paranoid about debt and inflation.
I mean, the dialogue in my world often sounds like this: inflation is a major danger --> No it's not, but if that will help you sleep better, then own assets with a moat, that have pricing power --> Are you talking about stocks? They are way too risky
Not to mention all those folks who think having a (really pricey) account in Switzerland is crucial because The State is going to confiscate everything in short order.
All this brings to mind Charlie Munger's words, according to which getting rich is easy, but staying sane in the process is the hard part.
I'm close to 60, and my whole adult life I've been constantly warned that everything's on the verge of collapse. But it never does. Most people go to automobile races to watch the race, but a certain percentage secretly hope for a firey wreck. I was always taught that one should own stocks and real estate because they rise in step with inflation ... i.e. even if one lived (as I did) through '70s inflation, one can take solace in the fact that equities have gone up 11% per annum on average since 1929, which is a pretty big cushion versus worrying whether normalized 2-3% on a bond or time deposit is going to make the inflation nut. It's said that the happiest day in an equity investor's life us the day a stock investment becomes a 10-bagger. The happiest day in a bond investor's life is the day he gets his money back. The happiest day in a gold horder's life is, uhh, never?
Speaking of which, thanks for not mentioning how becoming a gold bug and/or cryptocurrency zealot is sometimes the next depressing step in the perma-bear thought process you describe. I don't see how cracking down on crypto is any different that all the cash-related anti-money-laundering regulations put in place already. The very reason all the gold was called in back in 1933 https://en.wikipedia.org/wiki/Executive_Order_6102 was that rich people were panicing and hoarding their money in gold and burying it in their back yards instead of investing it in productive enterprises that employed people in the middle of a deep depression. I'm sure the Egyptians weren't terribly wild about the Pharaohs being buried with all that loot either, and the (actual) slaves who built them were doubtless grumbling that they'd rather have fiat money instead of dragging all those huge rocks around to build pyramid-shaped gold hoardes ;-)
Besides, no one ever explains how gold will actually be used in an apocalyptic collapse. Gold bug: "Here, let me slice off a piece of this gold bar in exchange for that can of food". Guy with the can of food, and a gun: "How about just handing me the whole bar?". And I've always thought that "prepping" was just assembling supplies for the toughest, best-armed guy on the block.
"Being negative also helps you appear smart. In a classic 1983 study by the psychologist Teresa Amabile, authors of scathingly negative book reviews were perceived as more intelligent than the authors of positive reviews. Intellectually insecure people tend to be negative because they think it displays their brainpower. Believing in vicious conspiracy theories can also boost your self-esteem: You are the superior mind who sees beneath the surface into the hidden realms where evil cabals really run the world. You have true knowledge of how the world works, which the masses are too naive to see. Conspiracy theories put you in the role of the truth-telling hero. Paranoia is the opiate of those who fear they may be insignificant." -- David Brooks, The Atlantic Monthly