1/

Get a cup of coffee.

In this thread, I'll walk you through the various connections between asset prices, interest rates, and inflation.

As an investor, it's useful to have a mental picture of how these pieces affect -- and are affected by -- one another.

2/

Suppose we have an investment opportunity.

This could be buying a stock, a bond, a private business, etc.

Let's say this opportunity will return $1M in cash to us after 1 year.

And not just that. This $1M will grow at 10% per year for the next 9 years, and 3% thereafter.

3/

This is a classic "cash flow model" that finance-y folk use all the time.

We have a business that promises to grow quickly for a while (in this case, at 10% per year for the next 10 years or so).

But after that, growth slows to a "terminal" crawl (3% per year).

4/

If we decide to buy this business, our "cash flows" from it will look like this over time:

5/

The question is: how much should we pay for this business?

Well, that depends on what kind of return we hope to get from buying it.

If we want a high return, we can't pay very much.

The lower the return we're willing to tolerate, the more we can pay.