Question...does getting 3% over the inflation rate (graphic No. 1) seem optimistic, or has that always been a reasonable goal? (even in days of higher returns, inflation was higher too).
You have an assertion embedded in a question. True that high inflation rates push down equity prices, and in a free market bond prices too, thus increasing nominal returns going forward, but it won't do much of anything positive for someone who is holding the stocks or longer duration bonds going into the period of high inflation. Also, we no longer have a free market in government bonds or interest rates.
The phenomenal bond and equity return that lasted almost 20 years for equities and even longer for bonds are a result of high inflation and even more importantly, Paul Volcker shutting off credit to kill the inflation of the 70s and early 80s. It wasn't inflation that caused high returns, it was the switch from extreme credit restraint and very high interest rates to a long period of falling rates, which may not even be over yet.
In your first sentence you use the word always. I can say with confidence that nothing is "always" in this arena, no matter what anyone tells you. We are in an unprecedented period with the Fed, the BOJ, and the ECB all engaging in full on "stimulus." All these represented nations have more debt to GDP than ever before in peacetime, and also more off balance sheet promises.
I am sure that someone will come along to remind me that the "great depression was worse, Firecalc survived it, blah blah blah. It is my opinion that unprecedented conditions mean that no longer are we drawing our white and black balls from that same jar as earlier. Unprecedented means there are no precedents. We are actually betting on the wisdom of a few people. Their forerunners have not performed so well as to give me a lot of confidence in what the current geniuses will do.
Pay your money and take your choices, ladies and gentlemen.
Ha