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Investing in deflation, inflation, and stagflation regimes

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Guido Baltussen discusses asset class and factor premiums across inflationary regimes.

Image courtesy of interviewee. August 21, 2024

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This video discusses a research project initiated in 2021 focused on understanding inflation trends and their impacts on financial markets and asset returns. Initially prompted by rising inflation concerns, the study aimed to fill the gap in data depth regarding inflation, particularly since recent inflation spikes were reminiscent of events from decades ago. The researchers gathered extensive historical data on inflation and asset returns spanning back to 1875, enabling a comprehensive analysis of various inflationary regimes.

Key findings reveal that inflation is a critical concern for investors, significantly impacting asset class returns. High inflation periods (above 4%) tend to yield lower nominal returns on equities and bonds, while moderate inflation (0%-4%) generally results in the highest active returns. Notably, the paper highlights that stagflation, characterized by high inflation and economic stagnation, poses a severe risk to investments, leading to particularly negative returns, especially in equities.

The study emphasizes the importance of a diversified approach to investment strategies across different inflationary regimes and suggests that understanding these dynamics can aid in managing associated risks, particularly for investors navigating uncertain economic environments.

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X-TIMESTAMP-MAP:LOCAL=00:00:00.000,MPEGTS=900000

00:00.105 --> 00:04.885
We started this project around 2021, when

00:04.945 --> 00:07.765
of course, inflation was became highly topical.

00:08.165 --> 00:10.485
I remember beginning of, 21

00:10.485 --> 00:13.845
that there were some worries about central banks not meeting

00:14.105 --> 00:16.885
ila, or that inflation was not meeting that target set

00:16.905 --> 00:19.085
by central banks around 2%,

00:19.105 --> 00:21.245
and there were worried that it would overshoot a bit

00:21.505 --> 00:22.525
to about 3%.

00:23.345 --> 00:26.085
Um, now of course we have seen what happened afterwards,

00:26.585 --> 00:29.085
way higher inflation numbers than,

00:29.105 --> 00:30.685
we saw, around that time.

00:31.185 --> 00:33.525
Um, and nowadays even talks about maybe

00:33.525 --> 00:36.765
that should be a more common target at the same time.

00:37.965 --> 00:40.505
Um, when you try to understand inflation

00:40.685 --> 00:43.385
and the impact on assets and investment returns

00:44.005 --> 00:48.345
and financial markets, a major downside

00:48.345 --> 00:50.105
or major worry is the lack

00:50.125 --> 00:52.385
of depth you have in your data samples.

00:53.265 --> 00:56.935
Given that the mo, the most recent inflation spike

00:56.935 --> 01:00.255
that we observed was the end of the, the end

01:00.255 --> 01:02.295
of the seventies and beginning of the eighties,

01:02.635 --> 01:03.735
so quite some time ago.

01:04.935 --> 01:06.995
Um, and that was just one episode.

01:08.325 --> 01:10.865
Um, to really reliably study inflation,

01:10.885 --> 01:12.225
you really need to go further back.

01:12.445 --> 01:14.265
Uh, moreover, amongst investors

01:14.325 --> 01:16.665
and academics, we encountered that

01:17.585 --> 01:19.845
not many really encountered inflation,

01:19.905 --> 01:21.165
or had experience with inflation.

01:21.225 --> 01:23.125
So how to think about it, it was more kind of a,

01:23.565 --> 01:27.085
a textbook concept than a practical concept.

01:27.865 --> 01:30.925
Um, so that also triggered us to really conduct a study

01:31.065 --> 01:33.925
to really try to understand as robustly

01:33.925 --> 01:35.365
and reliable as possible,

01:35.985 --> 01:38.485
how can we understand the impact on inflation?

01:38.555 --> 01:40.285
What is the impact on financial markets?

01:40.285 --> 01:41.605
What's the impact on asset class

01:41.605 --> 01:42.845
returns that we try to study?

01:43.065 --> 01:44.685
What's the impact on factor returns?

01:45.975 --> 01:48.995
Uh, hence we conducted the massive data exercise, which we,

01:49.135 --> 01:50.435
worked also on the years

01:50.435 --> 01:53.475
before in relationship to other studies to related

01:53.495 --> 01:55.035
to some the BH hacking debate.

01:55.535 --> 01:57.795
What's, what's there in science, what's there to stay

01:58.055 --> 01:59.235
and what's more spurious?

01:59.685 --> 02:01.115
There are out sample data help.

02:01.135 --> 02:04.555
So we had already brought up a dataset on the Russ

02:04.555 --> 02:07.115
University with the help of a lot of students,

02:07.295 --> 02:09.875
to collect stock specific returns,

02:10.055 --> 02:13.195
factor based returns across markets back to 1875,

02:14.075 --> 02:15.935
and we merged that here with inflation data.

02:16.315 --> 02:17.615
Uh, in terms of the literature,

02:17.615 --> 02:19.935
there has been a related study on the impact of inflation,

02:20.515 --> 02:25.055
but that, considered the last years,

02:25.055 --> 02:27.815
and not really inflation sample that far back.

02:28.515 --> 02:31.535
Uh, hence the reason also to, to focus on that.

02:32.115 --> 02:34.735
If you look, you can also see that in, in our paper,

02:34.955 --> 02:36.375
in in table one, where you look at

02:36.375 --> 02:37.415
the frequency of inflation.

02:37.515 --> 02:40.255
If you considered the last 30 years of this study,

02:40.365 --> 02:44.055
this data sample, that, that started in 10 92 up to 2021,

02:44.705 --> 02:47.015
there were, if you look at high inflation regimes,

02:47.015 --> 02:51.175
which defined as inflation above 4%, there were just,

02:51.355 --> 02:54.295
0.3 of those years of that whole sample.

02:54.475 --> 02:55.735
So in other words,

02:55.955 --> 02:58.575
the last 30 years is not really suited to study

02:58.645 --> 02:59.645
High inflation.

03:00.025 --> 03:03.085
Uh, and that's what's also unique about the study,

03:03.085 --> 03:05.845
really extending it as far back as possible.

03:06.405 --> 03:08.085
1875 is the star date of most

03:08.085 --> 03:12.445
of the inflation data at the global level that we have,

03:12.465 --> 03:13.725
before we have even

03:14.065 --> 03:16.045
as the class returns back to the 18 hundreds.

03:16.225 --> 03:18.685
Uh, but it's really about inflation that limits started

03:18.745 --> 03:19.805
to 80, 75.

03:20.665 --> 03:23.245
But then you also see a lot of these interesting dynamics

03:23.245 --> 03:27.445
because then you see, looking at figure one and, A

03:27.445 --> 03:28.605
and B, for example, of our paper,

03:28.625 --> 03:30.565
if you look at high inflationary episodes,

03:31.065 --> 03:32.485
it was the seventies and the eighties

03:32.745 --> 03:33.765
or the beginning of the eighties,

03:33.765 --> 03:36.645
but it was also around, world War I,

03:36.645 --> 03:38.405
around worldwide ii

03:38.625 --> 03:41.045
and in around 1880s for example as well.

03:41.045 --> 03:42.645
So you had many of those years in total.

03:42.705 --> 03:46.405
We have 40, six of those years in our sample.

03:46.585 --> 03:48.205
And it's not only about high inflation.

03:48.315 --> 03:49.725
What you often also see is

03:49.775 --> 03:53.725
after periods of high inflation, a lot of

03:53.725 --> 03:58.325
that inflation is tends to be driven by, demand shocks,

03:58.325 --> 03:59.925
demand spike up after, for example,

03:59.925 --> 04:01.805
covid lockdowns or the world wars.

04:02.225 --> 04:03.765
But supply is still disrupted,

04:03.765 --> 04:06.165
and that puts price on commodity,

04:06.165 --> 04:08.085
price on commodity prices creating inflation.

04:09.545 --> 04:12.965
And that dynamic tends to also mean referred that often

04:12.975 --> 04:15.005
after periods of very high inflation,

04:15.155 --> 04:16.405
some deflation is coming.

04:17.545 --> 04:19.845
And that's also a worry that we have seen that, for example,

04:19.945 --> 04:21.325
for a long period amongst investors

04:21.425 --> 04:22.725
in, in Japan, for example.

04:22.745 --> 04:26.165
And now in China. Uh, what's the impact of deflation?

04:26.185 --> 04:28.325
Now, there are the last 50 years,

04:28.385 --> 04:29.965
hardly any deflation episode.

04:29.965 --> 04:31.845
That's why you really need that deep sample

04:32.545 --> 04:34.245
to also understand those episodes.

04:34.745 --> 04:35.965
Key findings out, first of all,

04:36.045 --> 04:38.965
I think inflation has always been, a major concern

04:38.985 --> 04:41.085
for investors and deflation as well.

04:42.575 --> 04:44.995
Um, and we have seen many of those episodes.

04:44.995 --> 04:46.435
So it's quite important to understand.

04:46.775 --> 04:48.355
Um, what's also important, I think

04:48.375 --> 04:50.715
for especially financial markets, it's not so much about,

04:50.735 --> 04:53.195
transitory inflation stock that lasts,

04:53.195 --> 04:55.675
let's say a year is really about more longer lasting

04:55.675 --> 04:57.915
inflation that impacts future cash

04:57.915 --> 04:58.995
flows of stocks and bonds.

05:00.105 --> 05:02.645
Um, so that's also a perspective we take in the paper.

05:02.745 --> 05:06.485
And you see many of the inflationary episodes are quite,

05:06.705 --> 05:08.485
not short-lived, but tend to last

05:08.585 --> 05:09.725
for longer periods of time.

05:12.135 --> 05:15.995
If you then look at key results, maybe first

05:16.055 --> 05:19.355
to put results in a context that central banks that we know,

05:19.355 --> 05:20.995
the Fed has been there since the beginning

05:20.995 --> 05:23.595
of the 19 hundreds central banks in Japan,

05:23.615 --> 05:26.395
in the uk in Germany, for example, back to the 16,

05:26.395 --> 05:28.445
to the 18 hundreds,

05:28.795 --> 05:31.325
they did not always engage in inflation targeting

05:31.325 --> 05:33.805
that really happened after the 1970s,

05:34.265 --> 05:35.405
inflation shocks.

05:36.325 --> 05:38.665
But you do see, if you look at,

05:39.005 --> 05:40.865
how investors care about inflation,

05:41.375 --> 05:42.745
that it was always a topic.

05:42.805 --> 05:45.025
We measure that by, for example, measuring inflationary

05:45.025 --> 05:49.705
and inflationary reward in key, blocks

05:49.965 --> 05:52.425
and, and columns in the financial newspapers like the Wall

05:52.425 --> 05:53.585
Street Journal and the New York Times.

05:54.685 --> 05:55.945
Um, and the periods of inflation.

05:55.945 --> 05:58.285
Investors care about inflation and worry about it.

05:58.585 --> 06:00.725
And in terms of deflation, it's more they care

06:00.725 --> 06:02.085
and worry about deflation.

06:03.155 --> 06:06.535
And if we don't study the impact on asset returns, which is

06:06.535 --> 06:11.255
of course the most important part, there we see that,

06:11.555 --> 06:15.055
returns do vary across inflationary regimes.

06:15.055 --> 06:18.535
Equity returns tend to be lower in nominal terms,

06:18.675 --> 06:21.455
in deflationary and high inflationary regimes,

06:22.015 --> 06:25.535
deflationary redefine as inflation below 0%

06:26.765 --> 06:29.945
and high inflation as mentioned before, inflation above 4%.

06:30.325 --> 06:31.465
Um, in between

06:31.485 --> 06:33.905
or more the goldlock scenarios, the normal scenarios

06:33.905 --> 06:37.145
where inflation is just below central bank targets up

06:37.145 --> 06:38.585
to 2% or slightly above.

06:39.405 --> 06:42.425
Um, we're thought at the beginning of 21 when we started

06:42.445 --> 06:44.165
to study that,

06:44.235 --> 06:46.685
that was also kind of a goldilock scenario.

06:47.025 --> 06:49.365
Uh, 3% was then a major worry for markets.

06:50.145 --> 06:52.685
Um, it's hard to imagine that

06:53.315 --> 06:55.965
even like three years later, not that far away.

06:57.415 --> 07:00.525
Um, but we see that inflation in the zero

07:00.545 --> 07:03.885
to 4% range typically gives the highest, active returns,

07:03.905 --> 07:05.805
but also bond returns,

07:05.805 --> 07:08.605
and high inflation, lowest nominal returns.

07:09.025 --> 07:11.285
But especially given that inflation is high,

07:11.305 --> 07:14.325
it means real returns become negative on equities and bonds.

07:14.945 --> 07:17.085
So that's the, the episodes where investors,

07:17.285 --> 07:18.925
I would say especially should care about

07:19.485 --> 07:22.085
'cause the purchasing power on the investments the clients,

07:22.095 --> 07:24.965
while in deflationary episodes, you have the benefit

07:25.065 --> 07:28.965
of the lining prices, so your real returns are still,

07:28.965 --> 07:29.965
pretty good and decent.

07:32.175 --> 07:34.275
Um, so that's with respect to asset class returns.

07:35.065 --> 07:38.725
Uh, high inflationary episodes means,

07:39.205 --> 07:41.125
negative new return negative view

07:41.125 --> 07:42.885
returns on equities and bonds.

07:44.455 --> 07:46.915
We also look at other opportunities for investors.

07:46.935 --> 07:49.995
So especially the, the well-known phenomenon of equity bonds

07:50.015 --> 07:52.835
and global or multi asset factor premiums.

07:53.415 --> 07:55.955
Uh, there we see they tend to be pretty resilient

07:55.955 --> 07:59.035
and constant throughout the inflationary cycles.

08:00.325 --> 08:03.385
Uh, which in a sense also, when you look at a lot

08:03.385 --> 08:05.985
of market commentary and academic studies came out

08:05.985 --> 08:08.345
to a certain extent as a, as a surprise

08:08.345 --> 08:10.305
because many thought, for example, value add,

08:10.345 --> 08:13.185
a high interest rate in inflation sensitivity, the value

08:13.205 --> 08:16.185
of factor inequities that turned out to not be the case.

08:16.375 --> 08:19.625
It's pretty, constant to out, I think similar kind of,

08:20.265 --> 08:22.085
returns in high and, and,

08:22.145 --> 08:23.765
and low inflationary regimes.

08:25.315 --> 08:27.295
Um, as a consequence,

08:27.295 --> 08:30.295
also a balanced allocation across factors, factors,

08:31.075 --> 08:33.375
is quite resilient across inflationary episodes

08:33.375 --> 08:35.695
and helps also offset some of the, the,

08:35.695 --> 08:37.295
the drawbacks on equities and bonds.

08:38.325 --> 08:43.185
Uh, it also implies from that perspective that, equity

08:43.245 --> 08:45.025
and bonds probably they carry a risk premium.

08:45.135 --> 08:48.225
Part of that comes from the risk on high inflation.

08:49.375 --> 08:51.305
They disappoint on high inflation every times.

08:51.565 --> 08:54.905
Uh, so the WHI cream is also there to offset,

08:55.625 --> 08:58.325
the negative returns you earn in high inflationary episodes.

08:58.785 --> 08:59.845
And you can imagine a lot

08:59.845 --> 09:01.885
of the investors in high inflationary episodes,

09:02.025 --> 09:04.005
that's why they also need some returns, given

09:04.005 --> 09:07.845
that the prices they, they pay on the, on the spendings,

09:07.845 --> 09:09.805
they have on the consumption, they have also increase.

09:12.015 --> 09:15.915
Um, at the other flip side of it for equity factors,

09:15.985 --> 09:18.595
bond factors and other factor premiums in,

09:18.625 --> 09:22.075
what we call global factors, they are pretty constant across

09:22.595 --> 09:23.795
inflationary regimes.

09:23.945 --> 09:27.395
Also implying that they're not likely a compensation

09:27.415 --> 09:29.955
for microeconomic or inflation related risk premiums.

09:30.295 --> 09:31.395
Future reasons, of course,

09:31.425 --> 09:34.395
further understanding these inflationary regimes,

09:34.455 --> 09:37.235
but also looking at example, interest rate regimes

09:37.235 --> 09:38.675
and other microeconomic regimes.

09:38.675 --> 09:40.915
What's the impact? We have that deep historical sample.

09:41.575 --> 09:44.395
So that allows you to better understand,

09:44.935 --> 09:48.675
and very important one as well is, we not only

09:49.565 --> 09:53.155
break down inflation in four, we key regimes, deflation,

09:53.755 --> 09:56.795
moderate inflation, slightly overshoot, so that's inflation

09:56.795 --> 10:00.875
between two to 4% and high inflation inflation above 4%.

10:01.375 --> 10:06.195
But also we Shopify those in stagflationary regimes, so

10:06.195 --> 10:09.035
where you have high inflation and a recession

10:09.455 --> 10:11.675
or, where you have high inflation

10:11.735 --> 10:13.555
and expansion, et cetera.

10:13.695 --> 10:16.195
So we sub fight, especially the high inflation regimes

10:16.195 --> 10:19.395
and sub regimes and stagflation turned out

10:19.395 --> 10:22.235
to be a major worry, across academics and,

10:22.575 --> 10:25.195
and, investors and all of pension funds, et cetera.

10:25.855 --> 10:30.555
And in our results, we see that that worry is,

10:30.555 --> 10:32.955
completely correct in a sense that in

10:33.695 --> 10:37.155
stagflationary regimes when inflation is above 4%

10:37.175 --> 10:40.035
and there's a recession, that,

10:40.035 --> 10:43.395
especially equities experience the most negative returns we

10:43.395 --> 10:46.795
see there, that the normal return on equities is a negative

10:46.795 --> 10:50.275
minus 7% a year on average since 1875.

10:51.665 --> 10:54.995
Uh, on bonds, it's, it's positive,

10:55.015 --> 10:57.155
but when you then turn to real returns given

10:57.185 --> 10:58.915
that inflation is also high,

10:58.915 --> 11:01.875
that the returns on active are double digit,

11:02.075 --> 11:04.315
negative on average, minus 16.6%.

11:05.325 --> 11:08.385
Uh, and also bonds are not the, the return

11:08.445 --> 11:09.825
and the yield is not high enough

11:09.825 --> 11:11.505
to offset the high inflation.

11:12.365 --> 11:15.225
So that's really the, the, the worry episode

11:15.245 --> 11:18.265
or the bad time episode, where investors

11:18.405 --> 11:19.945
and academics should care about

11:20.365 --> 11:21.705
and try to better understand.

11:21.705 --> 11:25.755
That's where, in our interpretation, a lot

11:25.755 --> 11:28.595
of the risk premium also emerges from on equities

11:28.655 --> 11:30.235
and bonds,

11:30.665 --> 11:34.195
because that's, such a bad time episode for these kind

11:34.195 --> 11:36.275
of, premiums.

11:37.215 --> 11:38.385
Understanding that

11:39.395 --> 11:43.095
and also understanding ways to, to hedge that kind

11:43.095 --> 11:46.855
of stagflationary risk, I think is quite important for,

11:46.955 --> 11:48.535
for, academics.

11:48.555 --> 11:51.415
But also, I think the, in the investment industry.

00:00 - We started this project around 2021, when of course, inflation was became highly topical. I remember beginning of, 21 that there were some worries about central banks not meeting ila, or that inflation was not meeting that target set by central banks around 2%,

00:19 - and there were worried that it would overshoot a bit to about 3%. now of course we have seen what happened afterwards, way higher inflation numbers than, we saw, around that time. and nowadays even talks about maybe that should be a more common target at the same time. when you try to understand inflation and the impact on assets and investment returns and financial markets, a major downside

00:48 - or major worry is the lack of depth you have in your data samples. Given that the mo, the most recent inflation spike that we observed was the end of the, the end of the seventies and beginning of the eighties, so quite some time ago. and that was just one episode. to really reliably study inflation, you really need to go further back. moreover, amongst investors

01:14 - and academics, we encountered that not many really encountered inflation, or had experience with inflation. So how to think about it, it was more kind of a, a textbook concept than a practical concept. so that also triggered us to really conduct a study to really try to understand as robustly and reliable as possible, how can we understand the impact on inflation? What is the impact on financial markets?

01:40 - What's the impact on asset class returns that we try to study? What's the impact on factor returns? hence we conducted the massive data exercise, which we, worked also on the years before in relationship to other studies to related to some the BH hacking debate. What's, what's there in science, what's there to stay and what's more spurious? There are out sample data help.

02:01 - So we had already brought up a dataset on the Russ University with the help of a lot of students, to collect stock specific returns, factor based returns across markets back to 1875, and we merged that here with inflation data. in terms of the literature, there has been a related study on the impact of inflation, but that, considered the last years, and not really inflation sample that far back. hence the reason also to, to focus on that.

02:32 - If you look, you can also see that in, in our paper, in in table one, where you look at the frequency of inflation. If you considered the last 30 years of this study, this data sample, that, that started in 10 92 up to 2021, there were, if you look at high inflation regimes, which defined as inflation above 4%, there were just, 0.3 of those years of that whole sample. So in other words, the last 30 years is not really suited to study

02:58 - High inflation. and that's what's also unique about the study, really extending it as far back as possible. 1875 is the star date of most of the inflation data at the global level that we have, before we have even as the class returns back to the 18 hundreds. but it's really about inflation that limits started to 80, 75. But then you also see a lot of these interesting dynamics

03:23 - because then you see, looking at figure one and, A and B, for example, of our paper, if you look at high inflationary episodes, it was the seventies and the eighties or the beginning of the eighties, but it was also around, world War I, around worldwide ii and in around 1880s for example as well. So you had many of those years in total. We have 40, six of those years in our sample.

03:46 - And it's not only about high inflation. What you often also see is after periods of high inflation, a lot of that inflation is tends to be driven by, demand shocks, demand spike up after, for example, covid lockdowns or the world wars. But supply is still disrupted, and that puts price on commodity, price on commodity prices creating inflation. And that dynamic tends to also mean referred that often

04:12 - after periods of very high inflation, some deflation is coming. And that's also a worry that we have seen that, for example, for a long period amongst investors in, in Japan, for example. And now in China. what's the impact of deflation? Now, there are the last 50 years, hardly any deflation episode. That's why you really need that deep sample to also understand those episodes.

04:34 - Key findings out, first of all, I think inflation has always been, a major concern for investors and deflation as well. and we have seen many of those episodes. So it's quite important to understand. what's also important, I think for especially financial markets, it's not so much about, transitory inflation stock that lasts, let's say a year is really about more longer lasting inflation that impacts future cash

04:57 - flows of stocks and bonds. so that's also a perspective we take in the paper. And you see many of the inflationary episodes are quite, not short-lived, but tend to last for longer periods of time. If you then look at key results, maybe first to put results in a context that central banks that we know, the Fed has been there since the beginning of the 19 hundreds central banks in Japan, in the uk in Germany, for example, back to the 16,

05:26 - to the 18 hundreds, they did not always engage in inflation targeting that really happened after the 1970s, inflation shocks. But you do see, if you look at, how investors care about inflation, that it was always a topic. We measure that by, for example, measuring inflationary and inflationary reward in key, blocks and, and columns in the financial newspapers like the Wall

05:52 - Street Journal and the New York Times. and the periods of inflation. Investors care about inflation and worry about it. And in terms of deflation, it's more they care and worry about deflation. And if we don't study the impact on asset returns, which is of course the most important part, there we see that, returns do vary across inflationary regimes. Equity returns tend to be lower in nominal terms, in deflationary and high inflationary regimes,

06:22 - deflationary redefine as inflation below 0% and high inflation as mentioned before, inflation above 4%. in between or more the goldlock scenarios, the normal scenarios where inflation is just below central bank targets up to 2% or slightly above. we're thought at the beginning of 21 when we started to study that, that was also kind of a goldilock scenario. 3% was then a major worry for markets.

06:50 - it's hard to imagine that even like three years later, not that far away. but we see that inflation in the zero to 4% range typically gives the highest, active returns, but also bond returns, and high inflation, lowest nominal returns. But especially given that inflation is high, it means real returns become negative on equities and bonds. So that's the, the episodes where investors, I would say especially should care about

07:19 - 'cause the purchasing power on the investments the clients, while in deflationary episodes, you have the benefit of the lining prices, so your real returns are still, pretty good and decent. so that's with respect to asset class returns. high inflationary episodes means, negative new return negative view returns on equities and bonds. We also look at other opportunities for investors. So especially the, the well-known phenomenon of equity bonds

07:50 - and global or multi asset factor premiums. there we see they tend to be pretty resilient and constant throughout the inflationary cycles. which in a sense also, when you look at a lot of market commentary and academic studies came out to a certain extent as a, as a surprise because many thought, for example, value add, a high interest rate in inflation sensitivity, the value of factor inequities that turned out to not be the case. It's pretty, constant to out, I think similar kind of,

08:20 - returns in high and, and, and low inflationary regimes. as a consequence, also a balanced allocation across factors, factors, is quite resilient across inflationary episodes and helps also offset some of the, the, the drawbacks on equities and bonds. it also implies from that perspective that, equity and bonds probably they carry a risk premium. Part of that comes from the risk on high inflation.

08:49 - They disappoint on high inflation every times. so the WHI cream is also there to offset, the negative returns you earn in high inflationary episodes. And you can imagine a lot of the investors in high inflationary episodes, that's why they also need some returns, given that the prices they, they pay on the, on the spendings, they have on the consumption, they have also increase. at the other flip side of it for equity factors, bond factors and other factor premiums in,

09:18 - what we call global factors, they are pretty constant across inflationary regimes. Also implying that they're not likely a compensation for microeconomic or inflation related risk premiums. Future reasons, of course, further understanding these inflationary regimes, but also looking at example, interest rate regimes and other microeconomic regimes. What's the impact? We have that deep historical sample. So that allows you to better understand,

09:44 - and very important one as well is, we not only break down inflation in four, we key regimes, deflation, moderate inflation, slightly overshoot, so that's inflation between two to 4% and high inflation inflation above 4%. But also we Shopify those in stagflationary regimes, so where you have high inflation and a recession or, where you have high inflation and expansion, et cetera. So we sub fight, especially the high inflation regimes and sub regimes and stagflation turned out

10:19 - to be a major worry, across academics and, and, investors and all of pension funds, et cetera. And in our results, we see that that worry is, completely correct in a sense that in stagflationary regimes when inflation is above 4% and there's a recession, that, especially equities experience the most negative returns we see there, that the normal return on equities is a negative minus 7% a year on average since 1875. on bonds, it's, it's positive,

10:55 - but when you then turn to real returns given that inflation is also high, that the returns on active are double digit, negative on average, minus 16.6%. and also bonds are not the, the return and the yield is not high enough to offset the high inflation. So that's really the, the, the worry episode or the bad time episode, where investors and academics should care about

11:20 - and try to better understand. That's where, in our interpretation, a lot of the risk premium also emerges from on equities and bonds, because that's, such a bad time episode for these kind of, premiums. Understanding that and also understanding ways to, to hedge that kind of stagflationary risk, I think is quite important for, for, academics.

11:48 - But also, I think the, in the investment industry.

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