Lee, it helps me to think of inflation/deflation not from a price perspective but from a supply/demand imbalance standpoint. Inflation is demand exceeding supply, deflation is supply exceeding demand. The Fed can tinker with the yardstick used to measure it all - the dollar - all it wants, but it can't significantly impact the supply/demand imbalance. We have had inadequate real demand for years now. Aggregate demand has been buoyed by irreplaceable sources of debt. Think of debt kinda like fossil fuels - once that source of demand is wiped out, it's non-renewable. Well, the economy has just run out of non-renewable demand, and real aggregate demand is several percent below the present economy's run rate. Hence the huge deflationary pressures.
The Fed can monkey with the yardstick in which activity is measured - dollars - all it wants, but the real economy is in trouble. If it were to start jamming long-term interest rates lower artificially, it could temporarily prop up valuations, but I believe that concept has been discredited. The Fed is in the business of making money (they are a FOR-PROFIT institution) and they would lose bigtime through subsidizing the long bond.
What you are referring to is the inflation hedge properties of stocks. The earnings are the numerator of the equation, but the PE is the denominator. So, if earnings are growing 20%, but interest rates move up to 20%, it should be a wash in PE form. The only exception is book value, which would likely track inflation, but we all know stocks don't have book values any more.
One needs to recognize this inflation-hedge property, and as a result I believe any prudent bearish strategy involves significant exposure to inflation hedges. Mine is gold.
BC |
