Today’s Newsletter is Sponsored by Invictus Research

As many of you know, I am quite interested in financial history, economic data, and where they intersect. That said, keeping up with all of the economic data that comes out is a full-time job. One of my favorite “shortcuts” is the Daily Edge by Invictus Research.

The Daily Edge is a 6-10 minute video that covers all of the most important economic data and market moves from the day prior. It’s short, consumable, and 100% focused on connecting the dots between the economy and the markets (i.e. making you money). It’s like having a professional hedge fund analyst working for your portfolio… For the cost of a cup of coffee.

Visualizing History

The two charts below depict inflation figures in the US stretching back to 1913 by decade.


Finally, before getting into today’s Sunday Reads, I wanted to give one last reminder about the fascinating conversation I’ll be hosting with Dan Rasmussen and Michael Batnick on Wednesday @ 12PM EST. Among other things, we’ll discuss:

  • Market areas that have historically outperformed during periods of inflation and recessions
  • A cycle-driven approach to asset allocation
  • The bull and bear case for U.S. Large Cap
  • The state of private assets and whether they are attractive on a go ahead basis

Not one to miss, and its free to register! There will also be live Q&A with Michael and Dan at the end.


Okay, back to our regular programming…

In the Spring of 2019, my beloved Tottenham Hotspur made a wild and unexpected run to the Champions League Final – a tournament that pits the best teams from each European football (soccer) league against each other in a World Cup style competition. Tottenham are a team that give its fans fantastic highs and gut wrenching lows. The term “Spursy” refers to the club’s tendency to shoot itself in the foot with almost comical errors whenever the opportunity to seize the moment presents itself.

I hate to share this, but famed Italian defender Georgio Chiellini said this about Tottenham after we blew a lead against Juventus in the knockout round of the Champions League one season before our historic run.

With Tottenham, it’s always the hope that kills you.

Yet, in May of 2019, Tottenham secured a spot in the final of club football’s biggest competition against Liverpool. After dramatically knocking out Manchester City in the dying moments of the quarter-final, and then defeating Ajax in literally the last second of the semi-final, Tottenham seemed to have finally lost its “Spursy-ness”.

There were 3 full weeks between the semi-final and final, during which Tottenham fans had more and more time to gain confidence and a belief that this time was different. Despite playing a historically strong Liverpool team, Tottenham fans were increasingly optimistic. Personally, I even flew from DC to London for 72 hours so that I could be in London amidst a sea of Spurs fans in the off chance we actually won.

But then, after 3 weeks of anticipation and build-up to the big match… it was over after 22 seconds.

Just 22 seconds into the match, Sadio Mane crossed the ball into a backtracking Moussa Sissoko’s armpit, and Liverpool were awarded a penalty for handball. Thus, Liverpool were up 1-0 within a single minute, and the wind was completely knocked out of Spurs’ sails. To rub further salt in the wound, changes to the handball rule a year later would not have classified this incident as a penalty.

Yes, there was still a full match to play after that, but for the fairytale run Spurs had to the final and the three weeks of anticipation to all go out the window in 22 seconds was a brutal psychological blow that is tough for anyone to overcome. Game plan out the window.

Still, Tottenham were always the underdog in this final. It was Spurs fans’ expectation that this fairy tale run could have a fairy tale ending that inflicted so much pain. As always with Spurs, “it’s the hope that kills you.”

Now let’s talk about inflation and Tuesday’s CPI report.

A few weeks ago I wrote about how investors habitually overreact to CPI readings and Fed decisions like their lives depend on it. Consequently, investors similarly over-extrapolate single data points into flimsy narratives. To investors, the July CPI report published on August 10th signaled that inflation was on the decline, and there was reason to hope. Yes, it was just one data point, but from this kernel of truth a broader narrative was extrapolated about how inflation was waning.

Then, the August CPI report released on Tuesday crushed that ebullient narrative. Investors and the market had expected a 0.1% decline, but were greeted with a 0.1% increase instead. The market did not like this. Major indices like the S&P 500 and Nasdaq fell -4.3% and -5.2% on Tuesday, respectively.

The optimistic feelings about inflation from August were replaced with doom and gloom. As Bloomberg’s John Authers so eloquently put it:

“Not Good. Not Good at All. How bad was the August US inflation report? Let me count the ways. It’s a while since a macroeconomic release has come as such a nasty surprise, but on balance the extremely negative market reaction to the numbers was justified; they’re awful.”

Tuesday’s CPI reading, and the market’s “ohmygodweareallgonnadie” reaction was just another example of why investing based on one extrapolated data point (July’s CPI report) is a poor strategy. Sentiment and narratives can change with just one additional data point (August’s CPI report!).

Going back to Tottenham, the gap between each CPI release / Fed decision is analogous to that 3 week break between Champions League semi-final and final. Between each report, Like Tottenham fans in 2019, the gap between each event provides the market with a space for narratives to gain momentum, expectations to be set, and hopes to soar. Yet, like Tottenham’s soul crushing moment just 22 seconds into the 2019 Champions League Final, a single inflation data point released at 8:30AM EST each month can crush investors hopes and narratives just as swiftly as Moussa Sissoko’s handball penalty.

How to Invest During Inflationary Periods? 

“Okay, awesome Jamie, thanks for the self-indulgent Tottenham analogy. Now, what is some useful historical context on investing and inflation?”

Fair enough.

While the articles in today’s newsletter offer more details and context for the charts below, I’ve curated a few of my favorite below:

Asset Class Returns in Inflationary Periods

Sector Returns in Inflationary Periods

Factor Returns in Inflationary Periods

Now for today’s links!

The Best Strategies for Inflationary Times

Why This is Relevant: 

All anybody wants to know is “how do I invest during times of inflation?” Well , this paper offers a useful look at how different investment strategies, assets, and sectors hold up during bouts of inflation.


“Over the past three decades, a sustained surge in inflation has been absent in developed markets. As a result, investors face the challenge of having limited experience and no recent data to guide the repositioning of their portfolios in the face of heighted inflation risk. We provide some insight by analyzing both passive and active strategies across a variety of asset classes for the U.S., U.K., and Japan over the past 95 years.

Unexpected inflation is bad news for traditional assets, such as bonds and equities, with local inflation having the greatest effect. Commodities have positive returns during inflation surges but there is considerable variation within the commodity complex. Among the dynamic strategies, we find that trend-following provides the most reliable protection during important inflation shocks. Active equity factor strategies also provide some degree of hedging ability. We also provide analysis of alternative asset classes such as fine art and discuss the economic rationale for including cryptocurrencies as part of a strategy to protect against inflation.”

Visualizing History:

Summary Performance in US Inflationary Regimes

“The real total returns of assets analyzed in the paper, through the eight US inflationary regimes shown in Exhibit 1 as well as the annualized return during inflationary, non-inflationary, and all periods. In the first column, the strategy is denoted as active or passive by ‘(A)’ or ‘(P)’, respectively Returns for energies and gold in grey italics are spot returns where we do not have futures data. These are not included in the combined regime calculation. The data vary by start date. Further details are provided in the body of this paper as well as in Appendix A.”

Notable Quote:

“Our results suggest that trend-based strategies focusing on equity, bonds, FX, and commodities have strong hit rates during the eight inflation episodes and provide an impressive level of protection. We consider a range of equity portfolios and find that popular factors like value provide some benefit during our definition of inflationary times. While the average benefit is small, for example 3% real returns for a quality strategy to -1% for the value strategy, these factor portfolios perform far better than passive investments in stocks or bonds. The equity factors also have the extra advantage of high capacity.”


The US Money Explosion of 2020, Monetarism and Inflation: Plagued by History?

Why This is Relevant:

Using the Spanish Flu of 1918 as their guide, the authors of this paper study how Fed policy, pent-up demand, and inflation all interplayed post-pandemic, and how they impacted the economy. Sound familiar?


“Although the Federal Reserve’s quantitative easing of early 2020 was comparable in scale to 2008-2009, the implications for the growth of money in circulation and future inflationary pressures appear quite different. Absent the unprecedented surge in bank excess reserve ratios seen in 2008 and after, massive monetary base increases imply the possibility of a much larger, and potentially worrisome, increase in the money in circulation.

Rising inflation expectations are implied by such phenomena as the surging demand for Treasury Inflation Protected Securities and record highs for gold prices during the summer of 2020. These trends lend some support to market participants evincing concern that the surging money growth is, in fact, a precursor to future inflation.

Historical perspective on the 2020 situation is provided by data from the time of the 1918-1919 Spanish flu and available documentation of inflation following medieval and Roman-era pandemics. Indications of extra upward pressure on prices arising from pent-up spending after the epidemic has passed include the surge in bank loans in the aftermath of the 1918-1919 Spanish Flu pandemic.”

Visualizing History:

Notable Quote:

“One indicator of the impact on leisure spending is perhaps Major League Baseball attendance. Overall attendance fell by over 50% from 4,762,705 in 1917 to 2,830,613 in 1918 before more than doubling to 6,532,439 in 1919 after the pandemic came to an end.

The possibility that the baseball data are indicative of a more far reaching pent-up demand could help explain the fact that, after the pandemic came to an end, rising bank loans financed a “speculative orgy of 1919”. Even as the Federal Reserve maintained an unchanged discount rate, this policy had far from neutral effects given that the strong demand for loans at this time meant that it was “profitable for commercial banks to expand the stock of money at the then existing discount rate”.

This was accompanied by high levels of member-bank borrowing that subsequently deterred the Federal Reserve from reducing discount rates even as deflation set in during 1920. As shown in Figure 3 (above), money supply and prices rose together from 1915 through the end of 1919, prior to entering the sharp but relatively short-lived deflation of 1920-1921.”

A Post-COVID Recovery is Unlikely to Resemble the Roaring 20s

Why This is Relevant: 

This is an extremely interesting article from 2021, particularly as so many of its predictions are now coming true. The author argues that post-COVID we were likely to see 1999 levels of speculation, but then a 1919 level economic contraction (recession). Sounds about right!


“There is now increased debate with respect to the nature of a post-COVID economic recovery. Several financial writers have referenced the Roaring 20s as a historical period that may provide useful lessons. However, a deconstruction of the key economic drivers during the Roaring 20s suggests that this period provides few parallels to the circumstances in 2021. There are two historical periods, however, that do offer useful comparisons: the years 1919 and 1999. Drawing from the lessons from these two years, it seems plausible that a post-COVID recovery may combine a consumer spending rebound that is reminiscent of 1919 with increased speculation in the stock market that is reminiscent of 1999.

The paper concludes by encouraging investors to exercise caution, noting that neither the spending rebound in 1919 nor the speculative stock market bubble of 1999 lasted long. Therefore, it seems conceivable that after the initial, post-pandemic euphoria wears off, a similarly painful economic contraction and market correction could soon follow. Should this scenario occur, readers may benefit from considering this possibility and preparing psychologically for the consequences.”

Visualizing History:

Notable Quote:

“After the announcement of an armistice that ended World War I on November 11, 1918, most Americans feared that a deep depression was imminent. The thought was that the end of war-related spending, coupled with reduced European demand for U.S. exports, would lead to a collapse in economic activity. Although America did in fact experience a slight drop in real GNP of approximately 1% during the entirety of 1919, it was wholly attributable to economic weakness during the first few months of the year (which also happened to coincide with the third and final wave of influenza).

For the remainder of the year, despite a more than 50% reduction in war-related government spending, strong exports and consumer spending more than filled the void. It is hard to imagine that this was not primarily attributable to post-war and post-pandemic euphoria. Americans were understandably eager to purchase luxuries and re-engage in activities that they had suppressed for years. Further, it was not as if they lacked cash. Enriched by record U.S. trade surpluses and increased propensity to save, the wealth of Americans increased substantially during the war years.”


The Great Inflation, Factors, and Stock Returns (Video)


“The 1970s episode of sustained high inflation was structurally different from what we’re experiencing today. The prevailing environment can’t be compared to the “Great Inflation” era of the 1960s and ’70s, according to Ehren Stanhope. Stanhope, a principal at O’Shaughnessy Asset Management, joins Maggie Lake to explain why and how the situations are not the same, focusing on key differences in monetary policy, fiscal policy, the global energy market, and personal and corporate taxation. Stanhope, who believes inflation is likely to settle at a higher level, also shares his thoughts on where to invest in such a regime. Recorded on Tuesday September 13, 2022.”

Visualizing History:




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