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As economists and investors assess the chances that recent, higher U.S. inflation rates will prove transitory or permanent, they should not lose sight of the well-established fact that higher inflation is associated with lower equity valuations (typically measured by the price-earnings or “P/E” multiple). The facts are easy to forget because it is commonly (but falsely) believed that when central banks issue massive new sums of money which do not much lift prices of consumer goods, the money must “spill over” to spending on other things like equities (causing “asset price inflation”). Not so. Equities are almost as “inflation sensitive” (and negatively so) as bonds.
Article by Richard M. Salsman from AIER.
Higher inflation brings lower P/E multiples because it brings slower economic growth, more inflated (lower quality) profits, and higher interest rates; likewise, lower inflation brings higher P/E multiples because it brings faster growth, less inflated profits, and lower interest rates.
The S&P 500’s price-earnings (P/E) multiple roughly doubled from 19X at the end of 2018 to 39X at the end of 2020, without much empirical grounding or logical justification. On every possible front in 2018-19, the political-economic climate worsened. So did the fundamentals – economic growth, profits, and dividends. Historically, equity valuation expands sustainably when the policy climate is predictable and pro-capitalist. The past two years have seen policies (from Trump and Biden alike) that are unpredictable and anti-capitalist. Today’s high valuation is not sustainable; a major decline in the P/E multiple is possible by the time of the 2022 election, with profits (E) outpacing price (P) gains.
Another risk to high equity valuations is higher inflation. Some economists (mainly those Monetarists and Austrian-schoolers who are not familiar with the Fed’s new operating system) simply presume that U.S. inflation must accelerate due to huge increases in the money supply – which have certainly occurred since 2008. They have been warning about this for years now, while falsely predicting a 1970s-style dollar crash and much higher inflation. Their supply-only model obviously deemphasizes or ignores the possibility of an equally vast increase in demand to hold cash balances (i.e., hoarding by banks, companies, and households).
Other economists believe banks are holding more cash than usual because the Fed, since 2008, has paid them interest on required and excess reserves. This policy, they argue, depressed bank lending and ultimately inflation in the years following the financial crisis. But the rate paid is miniscule (today, just 0.15%) and when it was raised steadily from 0.25% to 2.40% (and kept above 2.00%) between October 2015 and September 2019, the ratio of excess reserves to deposits didn’t rise but declined (by 61%). Thereafter, as the interest paid on excess reserves was slashed (from 2% to the current low level), the excess reserve ratio climbed.
Table One reveals that the U.S. inflation rate has been much lower in the thirteen years since March 2008 (1.7% p.a.) even as the money supply increased 22.1% p.a.; inflation was 2.7% p.a. over the prior thirteen years (1995-2008), even though the money supply barely grew at all (1.5% p.a.). Clearly, no tight link exists between money supply and inflation. The difference is demand.
Figure One makes clear that for the past half-century there’s been an inverse relationship between the U.S. inflation rate and the S&P 500’s valuation (P/E multiple). The correlation is both high and negative: -66%.
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Figure Two depicts the same information but partitions the history into three distinct periods: years when the annual CPI rate was 1) low (2.5% or lower, average: 1.5% p.a.), 2) moderate (between 2.5% and 7.0%, average: 3.7% p.a.), and 3) high (7.0% or higher, average: 10.2% p.a.). The S&P 500’s P/E was quite high (average: 26.8X) in the first case of low inflation, much lower (average: 17.9X) in the second case of moderate inflation, and lower still (average: 9.0X) in the third case of high inflation.
It is possible that U.S. inflation hereafter accelerates amid a decline in the demand to hold cash balances, as Covid-phobia wanes, lockdown decrees diminish, and the U.S. economy “reopens.” Sustained, materially higher inflation has not yet been signaled by a rising gold price (it was up 40% in the year through August 8th, to $2,065/oz., but has since declined by 14% to $1,785/oz.). Yet banks, firms, and households might begin aggressively dispensing some of the cash they’ve been hoarding; that didn’t occur after the vast money creation of 2008-10, but it might occur now.
Have U.S. equity gains decelerated of late as the CPI rate has increased? Yes. The S&P 500 is up by 9% over the past three months, down from its 19% over the previous three months. Meanwhile the CPI, having increased by only 0.2% in the year through May 2020, has since increased by 4.9% (data through May). The CPI will probably increase by 3-5% for all of 2021. That is not nearly as bad as the 1970s, when the rate averaged 7.4% p.a. (and peaked at 13.3% in late 1979), but it’s still bad for equity valuations.
New Conservative Network Seeks Crowdfunding Help
They say we have to go big or go home. We’re trying to go big and bring the patriotic truth the the nation, but we need help.
Readers may or may not realize that over the past year, we’ve been bringing more conservative news and opinion outlets under our wing. Don’t take our expansion as a sign of riches; all of the “acquisitions” have been through sweat and promises of greater things to come for all involved. As a result, we’ve been able to bring together several independent media sites under a unified vision of preventing America from succumbing to the progressive, “woke,” Neo-Marxist ideologies that are spreading like wildfire across America.
The slow and steady reopening of America is revealing there was a lot more economic hardship brought about from the Covd-19 lockdowns than most realize. While we continue to hope advertising dollars on the sites go up, it’s simply not enough to do things the right way. We are currently experiencing a gap between revenue and expenses that cannot be overcome by click-ads and MyPillow promos alone (promo code “NOQ” by the way).
To overcome our revenue gap and keep these sites running, our needs fluctuate between $3000-$7000 per month. In other words, we’re in the red and hemorrhaging.
The best way you can help us grow and continue to bring the truth to the people is by donating. We appreciate everything, whether a dollar or $10,000. Anything brings us closer to a point of stability when we can hire writers, editors, and support staff to make the America First message louder. Our Giving Fuel page makes it easy to donate one-time or monthly. Alternatively, you can donate through PayPal as well.
As the world spirals towards radical progressivism, the need for truthful journalism has never been greater. But in these times, we need as many conservative media voices as possible. Please help keep NOQ Report and the other sites in the network going.
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Most “Conservative” News Outlets Are on the Big Tech Teat
Not long ago, conservative media was not beholden to anyone. Today, most sites are stuck on the Big Tech gravy train.
I’ll keep this short. The rise of Pandemic Panic Theater, massive voter fraud, and other “taboo” topics have neutered a majority of conservative news sites. You’ll notice they are very careful about what topics they tackle. Sure, they’ll attack Critical Race Theory, Antifa, and the Biden-Harris regime, but you won’t see them going after George Soros, Bill Gates, the World Economic Forum, or the Deep State, among others.
The reason is simple. They are beholden to Big Tech, and Big Tech doesn’t allow certain topics to be discussed or they’ll cut you off. Far too many conservative news outlets rely on Google, Facebook, and Twitter for the bulk of their traffic. They depend on big checks from Google ads to keep the sites running. I don’t necessarily hold it against them. We all do what we need to do to survive. I just wish more would do like we have, which is to cut out Big Tech altogether.
We don’t get Google checks. We don’t have Facebook or Twitter buttons on our stories. We don’t have a YouTube Channel (banned), an Instagram profile (never made one), or a TikTok (no thanks, CCP). We’re not perfect, but we’re doing everything we can to not owe anything to anyone… other than our readers. We owe YOU the truth. We owe YOU the facts that others won’t reveal about topics that others won’t tackle. And we owe America, this great land that allows us to take hold of these opportunities.
Like I said, I don’t hold other conservative sites under too much scrutiny over their choices. It’s easy for people to point fingers when we’re not the ones paying their bills or supporting their families. I just wish there were more who would make the bold move. Today, only a handful of other major conservative news outlets have broken free from the Big Tech teat. Of course, we need help.
The best way you can help us grow and continue to bring proper news and opinions to the people is by donating. We appreciate everything, whether a dollar or $10,000. Anything brings us closer to a point of stability when we can hire writers, editors, and support staff to make the America First message louder. Our Giving Fuel page makes it easy to donate one-time or monthly. Alternatively, you can donate through PayPal or Bitcoin as well. Bitcoin: 3A1ELVhGgrwrypwTJhPwnaTVGmuqyQrMB8
Our network is currently comprised of nine sites:
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We are also building partnerships with great conservative sites like The Liberty Daily and The Epoch Times to advance the message as loudly as possible, and we’re always looking for others with which to partner.
Some of our content is spread across multiple sites. Other pieces of content are unique. We write most of what we post but we also draw from those willing to allow us to share their quality articles, videos, and podcasts. We collect the best content from fellow conservative sites that give us permission to republish them. We’re not ego-driven; I’d much rather post a properly attributed story written by experts like Dr. Joseph Mercola or Natural News than rewrite it like so many outlets like to do. We’re not here to take credit. We’re here to spread the truth.
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We know we could make a lot more money if we sold out like so many “conservative” publications out there. You won’t find Google ads on our site for a reason. Yes, they’re lucrative, but I don’t like getting paid by minions of Satan (I don’t like Google very much if you couldn’t tell).
Time is short. As the world spirals towards The Great Reset, the need for truthful journalism has never been greater. But in these times, we need as many conservative media voices as possible. Please help keep NOQ Report and the other sites in the network going. Our promise is this: We will never sell out America. If that means we’re going to struggle for a while or even indefinitely, so be it. Integrity first. Truth first. America first.
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