Although he mentions the fact that once inflation gets going, its difficult to stop, Hulbert maintains that there is an arbitrary "sweet spot" for inflation for stocks. Apparently, if inflation is at a certain rate for a certain time, it gives a certain amount of goodness to stocks.
The data set her refers to was compiled by Robert Schiller at Yale University. The table is below.
Initial thoughts gravitate to the fact that the exact dates of the inflation and monthly returns are not given. It would not take much persuading to place a sizable wager on the assumption that the vase majority of the high inflationary periods took place after the Federal Reserve was created in '14, and concentrated primarily after Bretton Woods in 1971.
Inflation doesn't come about magically, or as some irrevocable and unavoidable condition of nature. It must be propegated by an expansion of the money supply, which raises the general price level of goods.
The fact that Schiller used a 12 month trailing indicator for his interrelationship between inflation and stocks actually makes his premise weaker.
The author of the paper inherently realized that the inflation was not immediate and widespread at its onset, but rather takes an amount of time, (arbitrarily set by Schiller at 12 months) to spread across all industries.
What this actually is demonstrating quite clearly is that when new money is created and doled out, it benefits the first receivers of the money the most. They are able to use newly created dollars to purchase goods at a price level that is relatively low compared to what it will eventually rise to when the money is disseminated throughout the economy.
Hulbert assertains the "sweet spot" for stocks is when inflation is between 2-3%, and that inflation's heating up is not necessarily bad for stocks.
Nothing is mentioned however, about the stocks inflation-adjusted returns after such an inflationary period, or how the S&P's performance tracked to commodities during those same periods.
The .96% monthly return he refers to is quite simply to explain: As prices rose for at least the past 12 months, it subsequently cost more to produce those goods. The new money that was created initially bid up the producer's basket of goods, and finally filtered through circulation to such a point where a sufficient number of people now had a higher number of dollars at their disposal.
This doesn't mean that people were wealthier overall, merely that there was a higher numner on the stock index or on their yearly investment statement than there way the year before. It's a rise in the nomical value of stock prices only, not a rise in true wealth.
The boom-bust cycle is easy to identify through this symple table as well. Inflation is difficult to stop once it gets going, and if it rises too fast, people are increasingly unable to purcahse goods in the same quantities they previously were able to.
The same percentage of months are shown for periods when inflation was 0% or below, and 4% and above. Notice the difference in returns between the two time periods.
Recognizing the fact that inflation tends to gain momentum once it starts, it's hard to believe that Hulbert would recommend a "sweet spot" of inflation of between 2-3%. Realizing how the inflation needle tends to swing from one extreme to another as more or less new currency is being printed, it would be extremely difficult, if not impossible, to recommend anything other than 0% inflation for ideal conditions for the economy.
Simply math shows the obvious benefit of having your portfolio increase at .61% inflation as apposed to higher inflationary-adjusted time periods.
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