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%.
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.
Thank you and God Bless,
Big Pharma’s Five Major Minions that Everyone, Vaxxed or Unvaxxed, Must Oppose
This is not an “anti-vaxxer” article, per se. It’s a call for everyone to wake up to the nefarious motives behind vaccine mandates, booster shots, and condemnation of freedom.
The worst kept secret in world history SHOULD be that the unquenchable push for universal vaccinations against Covid-19 has little if anything to do with healthcare and everything to do with Big Pharma’s influence over the narrative. Unfortunately, that secret has stayed firmly hidden from the vast majority of people because of the five major minions working on behalf of Big Pharma.
What’s even worse is the fact that Big Pharma’s greed is merely a smokescreen to hide an even darker secret. We’ll tackle that later. First, let’s look at the public-facing ringleaders behind the vaccine push, namely Big Pharma. But before we get into their five major minions, it’s important to understand one thing. This is NOT just an article that speaks to the unvaccinated. Even those who believe in the safety and effectiveness of the vaccines must be made aware of agenda that’s at play.
Let’s start with some facts. The unvaccinated do NOT spread Covid-19 more rampantly than the vaccinated. Even Anthony Fauci acknowledged the viral load present in vaccinated people is just as high as in the unvaccinated. This fact alone should demolish the vaccine mandates as it demonstrates they have absolutely no effect on the spread of the disease. But wait! There’s definitely more.
This unhinged push to vaccinate everyone defies science. Those with natural immunity may actually have their stronger defenses against Covid-19 hampered by the introduction of the injections which fool the body into creating less-effective antibodies. Moreover, the push to vaccinate young people is completely bonkers. The recovery rate for those under the age of 20 is astronomical. Children neither contract, spread, nor succumb to Covid-19 in a statistically meaningful way. What they DO succumb to more often than Covid-19 are the adverse reactions to the vaccines, particularly boys.
All of this is known and accepted by the medical community, yet most Americans are still following the vaccinate-everybody script. It requires pure cognitive dissonance and an overabundant need for confirmation bias to make doctors and scientists willingly go along with the program. Yet, here we are and that should tell you something.
Before I get to the five major minions of of Big Pharma, I must make the plea for help. Between cancel culture, lockdowns, and diminishing ad revenue, we need financial assistance in order to continue to spread the truth. We ask all who have the means, please donate through our GivingFuel page or via PayPal. Your generosity is what keeps these sites running and allows us to expand our reach so the truth can get to the masses. We’ve had great success in growing but we know we can do more with your assistance.
Who does Big Pharma control? It starts with the obvious people, the ones who most Americans believe are actually behind this push. Our governments at all levels as well as governments around the world are not working with Big Pharma. They are working for Big Pharma. Some are proactive as direct recipients of cash. Others may oppose Big Pharma in spirit but would never speak out because they know anyone who does has no future in DC.
This may come as a shock to some, but it’s Big Pharma that drives the narrative and sets the agenda for the “experts” at the CDC, FDA, WHO, NIH, NIAID, and even non-medical government organizations.
Most believe it’s the other way around. They think that Big Pharma is beholden to the FDA for approval, but that’s not exactly the case. They need approval for a majority of their projects, but when it comes to the important ones such as the Covid injections, Big Pharma is calling the shots. They have the right people in the right places to push their machinations forward.
That’s not to say that everyone at the FDA is in on it. Big Pharma only needs a handful of friendlies planted in leadership in order to have their big wishes met. We have seen people quitting the FDA in recent weeks for this very reason. The same can be said about the other three- and five-letter agencies. Too many people in leadership have been bribed, bullied, or blackmailed into becoming occasional shills for the various Big Pharma corporations. Some have even been directly planted by Big Pharma. That’s the politics of healthcare and science that drives such things as Covid-19 “vaccines.”