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Strategies & Market Trends : Bob Brinker: Market Savant & Radio Host
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To: MrGreenJeans who wrote (8874)12/23/1998 1:31:00 PM
From: Jim O'Hare  Read Replies (1) of 42834
 
I guess I was wondering why there should be an upper bound of 24.5 on P/E multiple expansion. My thinking is that the P/E multiple expansion is inversely proportional to interest rates.

If a company's fair value is simply the present value of future earnings, and interest rates decline, the fair value (price) of that company should go up assuming earnings remain constant.

The long-term trend of interest rates has been down since the early 80's. The cost of money is relatively high 3.5 to 4.0 % above inflation depending on how you gage inflation. Producer prices are going down. Much of the world is in depression. It would seem to me that long-term trend of interest rates remains down.

As for the "federal reserve", although they still do have considerable power in adjusting the cost of money, I think they are quickly losing that control. If they set interest rates too high, financial institutions can borrow from other central banks or too low and foreign financial institutions will borrow from the fed. In short, errant federal reserve policy in the not to distant future will simply be subsidizing large financial institutions and providing "free money" to global financial speculators.
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