In this op-ed encouraging the purchase of American equity, Warren Buffet makes a connection between stocks and inflation that I hadn't heard before.
Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.
Is Buffet claiming that the broad equity market automatically floats with inflation? I read a lot about investing, but I'd never heard that before. Presumably long-term bonds would react inversely.
"Is Buffet claiming that the broad equity market automatically floats with inflation?"
I would say that the equity market is independent of inflation. Government policy determines the number of dollars in circulation, and that number fluctuates in relation to the real value of the economy. The real value of a company is determined by supply and demand quite independently of the number of dollars in circulation.
Suppose that a company's value happens to be exactly 1% of the value of the total economy. And then the government doubles the number of dollars in circulation. That company is still worth 1% of the economy, and so its value denominated in dollars will double in the resulting inflation.
Ok, that's basically what I meant by "float", and they way you explain it makes it seem obvious. So you agree with Buffet that the gov't is likely to cause inflation, and that being invested in equities will help protect a person from the effects of that inflation?
Buffet's number one interest is Buffet. Don't underestimate his ability to say something that is more designed to helps HIS interests everybody else. Don't listen to him. Hold on to that cash and invest it in REAL ESTATE when it gets good and low low low. You can get awesome deals right now already. He doesn't want you to wait...till they get even better...