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  • Christian Armbruester

Reality Bites, Revisited



We like to look at things in nominal terms. Most of that has to do with our sense of time as we need reference points to put things into perspective. The S&P 500 is now at 4500. Three years ago, the index was at 3500, which is a gain of 28.57% which is easy to understand. But of course, our money is worth less today. When comparing the S&P 500 with an index that is adjusted for inflation, it makes for far less enthusiastic reading.


Up until the Great Financial Crisis interest rates were a lot higher relative to a CPI. That meant, that even with the internet bubble and the ensuing commodity super cycle, inflation was comfortably under control. Then came the ear of free money and asset prices rose faster than at any time in history. People got so rich we had to come up with new names for someone who is worth more than 150 countries. Yet still we did not have inflation.


Then came Covid. The average underperformance of the real vs nominal S&P500 index from 1990 until 2020 was 2.34%. Since then, it is almost three times higher, which has resulted in a loss of 15% of our money and counting. That tells us two things. One, with wealth destruction on such an epic scale, central banks will do anything to contain the dragon. Two, the S&P500 index in real terms is still more than 10% off the highs, which is reassuringly less expensive. Long live the current rally.

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