Money For Nothing And Your Shares For Free

Joachim Klement wrote a provocatively titled article, No, Stocks Are Not A Good Inflation Hedge. The link is to his substack which only provides a short summary to the original article at Reuters which is behind a paywall. 

Ok, is he right? The focal point is when inflation is 3% or higher, "history shows that real returns on U.S. stocks tend to drop quickly once inflation rates top 3%." First, the S&P 500 versus inflation for 55 years which I chose in order to take in the 1970's.

Long term, stocks are well ahead of inflation regardless of the inflation rate. 

Manually counting the year by year layout from testfol.io there were 28 years out of 55 when inflation was 3% or more. In those 28 years, the S&P 500 declined in 7 of them, 25% of the time which is very close to the percentage of years that the stock market is down overall. According to Copilot, in those 55 years, in the years where inflation was 3% or greater the S&P 500 compounded at 9.4% while inflation in those years ran at 6.1%. For just the 1970's, testfol.io shows the S&P 500 compounding at 8.38% versus 8.05 for inflation. Not great but not a negative real return.

Yes there were more instances in the 1970's but I'm not seeing Klement's conclusion. My favorite quote from the show Deadwood was when Hearst said to Bullock, "I am having a conversation you cannot hear." Maybe that's the case here as well with me playing the role of Bullock.  

PSUS is the latest investment vehicle from Bill Ackman. It is a closed end fund that just started trading on Wednesday. It was priced at $50 and to offset the normal decline associated with new closed end funds, the deal also included shares of the management company which has symbol PS for "free." This link might fill in the gaps.

Here's an exchange that Ackman apparently engaged in about the precipitous drop in PSUS' price. 

For a while it was common for new closed end funds to price at $25/share and very quickly fall by the amount of the sales charge which I seem to remember being about $1.50 but regardless of the exact amount, the sales charge built in to the $25 price is not part of the NAV of the fund and the market corrected that quickly. 

The ratio looks like for every 5 shares of PSUS that investors bought, they got one share of PS. So 100 shares on the IPO would have been $5000 and the would have received 20 shares of PS. On Friday, PS was up a ton to $37.99 and PSUS closed at $42.75. Twenty shares of PS plus 100 shares of PSUS adds up to $5034.80 at the close on Friday. I don't know why PS was up $9.99 on Friday but doing the same math 24 hours ago and the two would have added up to $4831.

If this process was correct then it's certainly not catastrophic (let's see what PS does on Monday) but no one got shares of the management company for free. 

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