Asset Inflation: When Assets Outrun Wages
Assets Inflate First
📈 Stocks
Multiple Expansion
Lower rates → higher P/E
Mechanism
Buybacks
Cheap debt → repurchases
Liquidity Flows
QE chases returns
CAPE Ratio
Elevated vs history
🏠 Housing
Mortgage Rates
Rates fall → prices rise
Key Driver
Institutional Buyers
Wall Street bids
Supply Constraints
Zoning, materials
Rent vs Price
Cap rates compress
💵 Bonds & Cash
Financial Repression
Yields < inflation
Policy
Negative Real Rates
Guaranteed loss
Reach for Yield
Risk moves up
Duration Risk
Rates up → prices down
🔧 What To Do
Own productive assets
Stocks/real estate
Essential
Avoid long bonds
Short duration only
Watch valuations
Trim extremes
Why Assets Inflate Faster Than CPI
- QE increases money supply, which first flows to financial assets
- Low rates reduce discount rates, boosting valuations mechanically
- Corporations issue cheap debt to buy back stock
- Housing affordability is payment-driven; lower rates let buyers bid up prices
Evidence & Ratios To Watch
- S&P 500 Market Cap / GDP (Buffett Indicator)
- CAPE (Shiller P/E)
- Home Price-to-Income, Price-to-Rent ratios
- M2 growth vs CPI (asset inflation leads consumer inflation)
Strategy
- Accumulate assets when liquidity rises and rates fall
- Favor quality/value when valuations are extreme
- Avoid long-duration bonds during rising-rate cycles
- Maintain dry powder for liquidity shocks (QT)