Considering asset inflation

Investment Analysis Clubs Macro Economic Trends and Risks
1

CPI measures the inflation of consumables. But how does it look with inflation of non-consumable assets on the capital markets?

1) Stock market
Price to Sales ratio of S&P 500 companies has risen 50% from 2 x sales to 3 x sales in the last 5 years.

In other words, the price has risen 50% faster than companies actually grew.

There could be hypothetical explanations why this price increase is warranted:
a) the market is expecting steep revenue growth in the coming years: in order to get down to 2 x sales and keeping 10% YoY price increase, the revenue would have to grow by 140% in 5 Years, but in 2024 the YoY revenue growth was just 10%, or 60% compunded in 5 years: so just expected growth cannot account for the price.
b) The risk for stock investment is significantly lower than in 2020. One could argue that a global pandemic was the source of the risk, but in fact most of the price gain happened in the first year of the pandemic suggesting that an increase in money supply to the capital markets has caused the pricing increase rather than risk.

2) Precious Metals
The price of precious metals has risen by 100% in the last 5 years
The big question is whether this is driven by investor demand or industrial demand:
a) in the 2019-2024 period industrial demand for silver has grown by 35% while investor demand has grown by 13%. Jewelry and silverware has remained at the same levels.
b) Gold seems to be mostly driven by growth in investment demand and central banks demand which rose by 32% and 54% YoY respectively. Industrial demand only rose by 2%.
Given that GSCI precious metals is 90% gold and 10% silver, it seems most of the PM price rise comes from investments.

  1. Real Estate
    Median listing price per sq foot of housing has increased by 50% since 2020.
    Here are also a couple factors to consider:
    a) The amount of housing units has increased by circa 5% since 2020
    b) Urbanization has increased by 1% since 2020

  2. Population indicators
    The US population has increased by 3% since 2020 and median wage has grown by 25%. This means a median demand for assets could have increased by 29%

  3. Foreign investment
    It’s almost impossible to gage foreign investment into the stock market, real estate and precious metals as FDI and FPI are insufficient for such a calculation. However whether asset inflation is caused by predominantly foreign or predominantly local flow of capital should be seen in FOREX in the last 5 years:
    USD to EUR: -1%
    USD to GBP: +/- 0%
    USD to AUD: - 10%
    USD to CHF: - 12%

It seems over the last 5 years FOREX has been flowing away from the USD indicating that demand for US assets from abroad has not risen considerably but this would have to be adjusted for trade imbalance in goods and services.

Conclusion
From the numbers above the US population’s buying power should have increased by 25% but asset prices have increased by 50% to 100% depending on asset type. Adjusting for factors corresponding to the asset type does not seem to suffice in explaining the nominal price growth:

  • stock price growth does not seem to stem from expected revenue growth and risk factors don’t seem to be better than 5 years ago
  • precious metal price seem to be driven by demand from capital markets and not by industrial or jewelry demand
  • housing price is adjusted to sq foot and cannot be explained by urbanization rate, population growth rate or reduction in housing units

It seems like asset prices are rising compared to population’s purchasing power in rates significantly higher than consumer price inflation.

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2

The wealthy are driving up the price of all assets.

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3

In a lot of big cities, a significant portion of the housing stock is unoccupied and owned by wealthy foreigners as an investment. It may be only a few percent, but in a tight market that’s enough to spike prices and rents.

intercst

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4

Consumer price inflation and asset price inflation are different.

Consumer price inflation is driven by the difference between supply and demand of consumer goods and services. This was largely driven by Covid fiscal stimulus over the past 5 years which went directly into consumer pockets, driving an increase in disposable personal income.

Asset price inflation is driven largely by monetary stimulus in addition to fiscal stimulus. Quantitative Easing (QE) went to the banks which loaned relatively little to consumers. The immense monetary stimulus by the Federal Reserve drove asset price inflation (real estate, bonds, stocks). It’s a tsunami of money that amounts to about 1/4 of GDP created out of thin air. The Fed drove asset price inflation with ultra-low interest rates driven by QE bond buying.

Wendy

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