Shiller’s cyclically adjusted price-to-earnings (CAPE) ratio for the S&P 500 is currently 34.66. This is representative of a stock market that has lost all contact with reality. This figure far exceeds the CAPE ratio of 31.48 in 1929, right before the stock market crashed and the Great Depression began.
But it is not at an all-time high. There are two instances where the CAPE ratio is higher than it is today. In December 1999 – at the height of the dot-com bubble, just before its collapse – the CAPE ratio reached 44.19. And in October 2021, the CAPE ratio reached 38.58.
To be clear, the CAPE ratio looks at stock prices relative to average inflation-adjusted earnings over the past 10 years. This provides a big picture that smoothes out annual revenue fluctuations.
According to the S&P 500’s CAPE ratio, stocks are incredibly expensive today. That doesn’t mean there will be a crash tomorrow. In reality, it may end up being much more expensive. What this means is that at today’s prices, stocks are very risky in terms of the potential reward they can offer.
As the U.S. economy slows heading into the summer and inflation continues to rise, there is a growing possibility that it will fall into stagflation. When an economy is characterized by rising unemployment and rising consumer prices.
With stock prices at extreme valuations, an economic slowdown and the resulting credit crisis could be the pin that finally bursts the bubble. The stock will probably be down 20-30% to end the year. Maybe more. Nonetheless, the actual losses will be masked by inflation.
But the central planners pretend not to see it…
theoretical contradiction
Federal Reserve Chairman Jerome Powell recently dismissed the idea of stagflation. that said he can’t see “‘Stag’ or ‘Plate’.” This is the guy who keeps saying inflation is the problem. “temporary” In 2021, it reached a 40-year high.
Without a doubt, Powell only looks at government-manipulated data and statistics as evidence of economic conditions. He misses the forest more than the trees. A cross-country trip would open his eyes. He will look back to the not-so-distant past.
For example, in the late 1970s, inflation and unemployment rose simultaneously. According to leading economists, this was considered impossible. Their academic training said so.
The Phillips curve shows that there is an inverse relationship between inflation and unemployment. When unemployment falls, inflation rises. Conversely, as unemployment rises, inflation falls.
The Phillips curve does not show inflation and unemployment rising simultaneously. Theoretically, these two variables were assumed to be mutually exclusive.
When economist William Phillips first plotted the curve using British wage and unemployment data from 1861 to 1957, his depiction of explainable order was impressive. Moreover, his curves provided an economic model that central planners could use to optimize inflation and unemployment through economic intervention.
However, by the late 1970s, the Federal Reserve’s excessive monetary intervention and Congress’s excessive deficit spending had brought reality to the point of theoretical contradiction. When unemployment began to rise in the 1970s, Congress, with support from the Federal Reserve, did as Keynes directed. We ran a deficit to stimulate the economy and promote job creation.
rendering it useless
According to the tenets of the Phillips curve, as unemployment rose, central planners could have their cake and eat it too. They can print money and increase deficit spending without raising consumer price inflation.
But something completely unexpected happened. Instead of stimulating jobs, the stimulus stimulated inflation. Then we applied more stimulus and still didn’t get the jobs. Instead, we experienced more inflation.
Phillips’ work will forever remain a shining example of why economic theory cannot be derived from empirical data. There are too many variables. The experience of the 1970s turned Phillips’s intended curve upside down.
Rising inflation and high unemployment in the 1970s showed that the economy was difficult to predict. In 10 years, people will be borrowing money to spend. Next, you will save and pay off your debt. No graphical curve can predict how people’s behavior will change from one period to the next.
This also shows that the pre-1971 data sets used to identify the relationship between inflation and unemployment have become obsolete. When Nixon closed the gold window, removing the last vestiges of gold from the monetary system, their relationship could be distorted beyond recognition.
Logically, when the unemployment rate rises, the economy sinks. Wouldn’t this lower the inflation rate?
Contrary to the experience of the late 1970s, Fed planners are expecting this. They are banking on a weak economy to slow consumer price inflation to within an arbitrary 2% target.
But they’re also trying to delay this until after the election to boost Biden’s odds. Powell knows that if Trump wins, he will receive a pink slip.
This inflation script won’t last
this week CPI report Consumer prices rose 0.3% in April and 3.4% over the past 12 months. The 3.4% annual CPI increase reported in April is 70% higher than the Fed’s arbitrary inflation target of 2%.
At an annual inflation rate of 3.4%, the purchasing power of a dollar is halved every 15 years. But you don’t have to look that far back in time to see signs of extreme dollar depreciation.
CPI has increased year-over-year since March 2020, when governments shut down the economy and pumped trillions of dollars into the printing presses. 258.115 ~ 313.548. This is an increase of 21.5%.
But Wall Street took the latest CPI numbers as a sign that the Federal Reserve will cut interest rates this year. Following the report, the DOW, S&P 500, and NASDAQ all hit record highs. On Thursday, the DOW briefly topped 40,000 for the first time ever. what’s the matter?
Simply put, this manipulated CPI data was scripted to fit the Fed’s plans. By telegraphing interest rate cuts, the Fed is getting higher stock prices that Washington needs. This is because inflated stock prices serve to inflate government tax revenues.
With net interest on debt rapidly approaching $1 trillion per year, Washington needs all the capital gains taxes it can get. That’s why President Biden wants to increase his capital gains tax by up to 100%. 44.6%. If the stock market falls, this revenue stream will disappear and your financial situation will worsen.
The inflation and interest rate script may, for now, unfold as planners intended. But that doesn’t mean the economy won’t slow down and we won’t slide into a new era of stagflation. These realities will soon overwhelm the script.
A slowing economy, rising unemployment and falling stock markets in the face of $2 trillion in deficit spending will not slow consumer price inflation as much as the Fed’s Phillips Curve enthusiasts expect. In fact, it will get worse.
Lower income and capital gains tax revenues with the new stimulus package will lead to higher deficit spending, along with consumer price inflation.
[Editor’s note: It all started roughly 25 years ago in a world both very similar and different than today. This awareness is important if you desire to use economic recessions to build investment wealth. And if you’ll give me a moment, I’d like to share my story with you. >> Click Here, to discover how to use recessions to build investment wealth.]
thank you,
minnesota gordon
for economic prism
A return from this inflationary script will not last through the economic prism
