Sunday, December 12, 2021

Another Fine Mess The Fed Has Gotten Us Into

 Laurel and Hardy had a catch phrase with variations on "well here is another fine mess you have gotten me into".  The Fed has blown many bubbles since it was created over 100 years ago but this is the first "everything bubble" and a really fine mess.

The core problem is that the bubble economy and government are now dependent on interest rates that are near zero but these low interest rates are causing inflation.   The Fed's duel mandate of high employment and stable prices requires that they raise interest rates to fight inflation.   But this is likely to pop the everything bubble.

The Fed is targeting 2% inflation.  The latest CPI reading was 6.8%.  It has been going up very quickly.   The current CPI uses owners equivalent rent, where they go around asking non-renters what they think their house could rent for.  This is just just aggregating made up numbers and not collecting real housing price data.  People experience real inflation and not the made up numbers.  If you use real housing data, like they used to, the CPI comes out to 11%.  There are other tricks in the CPI that cause it to understate inflation.  Really inflation is at least 9% above the Fed's target.  

There is a Taylor Rule for figuring out what interest rate the Fed should use to get inflation back to its target rate.  It is easy to try out the Atlanta Fed Taylor Rule Calculator  to see what rate should be used.   But really you should have 2 or 3% more than the current inflation rate.   The only way Paul Volker could control inflation was by raising interest rates above the inflation rate.  We really need something like 13% interest rates to control this inflation.  Staying near 0% will encourage more inflation.

Some people ask, "how could increasing interest rates fix supply chain problems?".   The wrong idea here is that the current inflation is just caused by supply chain issues and these are not things the Fed can fix.   Let me try to explain.   Imagine each businessman is seeing various costs for his input supplies going up at  numbers like 10%, 15%,  25%, 50%.  Also imagine that banks pays him 0% if he leaves the money in the bank and charges him only 2% if he borrows money.  The rational thing for him to do is order extra of his input supplies, either with cash on hand or by borrowing.   In these conditions he is better off using these input supplies as a store of value.   With 0% interest and these inflation rates, the dollar is not a "good store of value".   The dollar has lost one of the key attributes of good money.   But the supply chains were designed for normal monthly supply quantities and not for businesses also using supplies as a store of value.  This additional usage is too much.    If interest rates were at 13% many more businessmen would use money as a store of value instead of input supplies.  If the Fed raised rates to 13% the supply chain would be fixed right away.  Really. 

When the local money fails as a store of value, you always see laws against "hoarding" as if that was the core problem.  Hoarding is a symptom of bad money, not a core problem.

It is also not clear to many people how the Fed has caused the labor shortage, so let me try to explain that as well.  By dropping interest rates to zero the Fed has about doubled the stock market since the 2020 low.  This has made many people feel rich enough that they think they don't need to work, so they quit.   If the Fed were to increase interest rates, probably the stock market would crash, and many of these people would be looking for work again.

The US Federal Government has over $29 trillion in debt.    These days much of it is short term T-bills and not long term Treasuries.  If interest rates went to 13% the interest could be more than the total taxes collected.   Many companies and individuals have also taken on lots of debt to take advantage of the low interest rates.   If rates go up they will have a very hard time.

The market is only expecting two rate hikes of 0.25% each in 2022.  The market is thinking we will be at 0.5% interest 12 months from now.   This is nowhere near high enough rate to fight inflation.  Inflation has been going up 0.5% per month many times recently.  Without some serious effort to fight inflation soon, we will see far higher inflation by the end of 2022.     On the other hand, even 2% rates now would no doubt crash the stock market and slow the economy way down.   It is another fine mess the Fed has gotten us into.

Monday, December 6, 2021

Inflation Going Higher

The Nov 2021 CPI report comes out Dec 10th.   The Oct CPI was 6.2%.   Here are three different estimates for Friday's number:

  1. Cleveland Fed estimates 6.6%
  2. Lyn Alden says  economists are estimating 6.7%
  3. Trading Economics forecasts 6.9%

As Edward Garbarino commented in response to Lyn's tweet, "If Powell did not have information indicating significant worsening inflationary pressure on the horizon, he would not have jettisoned the "transitory inflation" narrative, IMHO."

This year the real CPI numbers have surprised to the upside many times.  We may be at 7% or more on Friday. 

People are expecting that about a 0.5% increase in the Fed Funds rate in 2022 will tame inflation.   This is naive.   Given how fast inflation has been going up (frequently 0.5% per month) that is far too slow a pace of increasing interest rates to ever get ahead of the inflation rate.   If interest rates stay far below the inflation rate, inflation will continue to go up.  Interest rates need to be well above the inflation rate to be "fighting inflation".

Historically when inflation starts going up the Fed tightens and the market goes down.  It really seems that this is likely soon.

However, if we have 7% inflation then it would take something like 10% interest rates to get control of it.  If we had such rates the economy would be dead and the government bankrupt.   But if interest rates stay low, inflation can get out of control.  It really could go to hyperinflation.  Either choice the Fed makes has a really bad result.   There does not seem to be any nice way out at this point.

Thursday, September 2, 2021

Private Economy is the Real Economy


Government economists define GNP to include government spending.   This way the more government spending, the higher the GNP.   So if they need to "grow the economy" all they have to do is increase government spending.  The more the government is spending, the more power they have. 

The reality is that government is a leach on the real productive economy.  They are taking resources from the productive parts by taxation and money creation (inflation).   Government does not add to the economy, it sucks life out of the economy.   

If we subtract government spending from the official GNP and scale for inflation, we get the following graph which gives a better idea of the Real Economy.

First, looking at this graph it is crazy for the stock market to be up by about a factor of 7 in the last 12 years.   The real economy is not doing anything close to that kind of growth.

Next, the idea that government spending fixed the recession last year so it was only 2 months is silly.   Sure they got the "official GNP" back up, but the real economy is still way down.

Saturday, August 21, 2021

Graveyard of Empires


Biden and others have called Afghanistan the Graveyard of Empires.  There are a number of definitions of "empire" but here we will use:

   Empire:  A government that collects taxes from other countries.

By this definition I believe the USA is an empire, though using a tax very few recognize.   As Keynes put it:

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.

After world war 2 the US dollar became the world reserve currency.   Since then Central Banks, businesses, and people all over the world have been using the US dollar and holding US bonds.   As the US prints more dollars, they are really collecting a hidden tax on dollar holders all over the world.   This is a most diabolical tax, as it is so secret and unobserved.   This "inflation tax" has gone on for more than 70 years.

Recently the pace of money printing has increased to trillions per year.   This may be getting to the "evil empire" stage, where there is a tax revolt

The fraction of US debt held by foreigners has been dropping recently:

Source:  Fred

If enough people realize that holding dollars makes them subject to this tax, and so decide to no longer use the dollar, we could easily get hyperinflation.

The rest of the world could leave the dollar for something else.  For example, other central banks could use gold as reserves to back their own currencies.  Gold is what was used before the dollar and could work again.  A number of central banks do seem to be buying gold faster recently.   For international settlement, Bitcoin could work.    No doubt such a major change will be chaotic for awhile.  After the change most of the world could be better off, as they would no longer pay the US dollar inflation tax.   However, the USA will be much worse off, as they will no longer collect this huge inflation tax from the rest of the world.

Like other empires that failed after failing in Afghanistan, probably the American Empire is coming to an end.  


Saturday, August 7, 2021

Devil in the Details

 The low on the S&P 500 in 2009 crash was 666.   If we multiply that by 6.66 and round off just a bit we get 4444.    A factor of 6.66 in 11 years should qualify as "frothy".  Seems like 4444 is a good number for a high. 

Friday, August 6, 2021

Extreme Valuation and Crash Warning Charts


They say "no one rings a bell at the market top".   But there are signs that things are higher than normal or getting shaky.  I am collecting links that show charts indicating extreme stock, bond, or real estate valuations or things that often come before crashes.  If you know of other such links that you like, please comment and I will add them to the original post.  Thanks.

  1. How to Spot a Bubble, March 2021, Hussman
  2. Crescat Capital March Research Letter
  3. Shiller PE, gurufocus
  4. Buffett Indicator, gurufocus
  5. Goldmen Sachs Non-Profitable Technology Index, Robeco 
  6. Is the Market Still Overvalued?, Advisor Perspectives, 8/21 
  8. P/E and inflation, Advisor Perspectives, 8/21 
  9. 14 Warning Signs That a Stock Market Crash Is Coming, 
  10. Stock Market Crash, Fragility And Silence, 
  11. This one signal says a stock market correction may be on the way,
  12. Whole Lotta Love: Sentiment’s Potential Warning, 
  13.  What Triggered the Crash?, John Hussman, 7/20/21 
  14. Alice’s Adventures in Equilibrium, John Hussman, 6/21
  15. Grantham:  This is a bubble, this is serious 
  16. Warnings about a stock market crash are growing louder, 
  17. These 23 Charts Prove That Stocks Are Heading For A Devastating Crash,  July 2014
  18. The Folly of Ruling Out a Collapse, Hussman Aug, 2021
  19. Recession Alert! Morgan Stanley, Rabobank, Normura, & BofA Warn Investors a Crash is Coming Aug 25, 2021
  20. Four Reasons the Next Recession Will Be Worse Than the Last One 9/10/21 
  21. Technically Speaking: The Markets Next “Minsky Moment” 7/27/21 
  22. The Beginning Of The End -Alasdair MacLeod 10/11/21
  23. When Bubble Meets Trouble - Hussman 11/9/21

From the above, I think one of the most important charts is:


At the current inflation level we have never had such a high P/E before (yellow box).   If inflation gets higher this P/E will be even more extreme.

Sunday, August 1, 2021

Inflation Expectations are Never "Well Anchored"


Jerome Powell keeps saying, "inflation expectations are well anchored".   This "well anchored" makes it sound like they can't easily change.

 The reality is people expect inflation about like the current inflation.  As seen in the graph below, if the CPI (green line) goes up, as it has the last 4 months, people's expectations goes up too (blue line).   For Powell to think it it safe to print money because people are not expecting much inflation at this moment is foolish.   People's expectations can change in a month but the "long and variable delays" from policy change to inflation change  can take years.

Inflation can get into positive feedback loops that are very hard or impossible to control.  The central banker needs to take a long term view, because inflation responds so slowly to their policy changes.   It is irresponsible to make decisions about money creation based on a short term and fickle measure like people's expectations.  

The reality is that people's expectations are never "well anchored".  If we get CPI numbers of 6% or 7% then inflation expectations will move to that range also.   Maybe then Powell will stop saying, "inflation expectations are well anchored".

Sunday, July 25, 2021

How Fed Fights or Encourages Inflation


When Paul Volcker fought inflation, the way he did it was letting interest rates go higher than the inflation rate.   The graph below has 10 year interest rate (blue), the inflation rate (red), and then the difference between these (green).   When the green line was far below zero Volcker was fighting inflation hard.

However, when the green line is near zero or above zero, the Fed is encouraging inflation.   In the 1970s the green line was near zero or spiking above zero.  This was encouraged the inflation of the 70s. 

As Milton Friedman taught, inflation is always and everywhere a monetary phenomenon, but there are long and variable delays between Fed policy inputs and the inflation result.   It can take years for inflation to show up, or go away, after a Fed policy change. 

For the last few years the green line has been near zero and above, similar to the 1970s.   Having interest rates below the inflation rate is once again encouraging inflation.    Inflation is starting to show in measures like the CPI.

Intuitively this makes sense.   If it is possible to borrow money at rates below the inflation rate then lots of companies and people are going to borrow money, which will cause the banks/fed to increase the money supply, which will cause more inflation. 

Sunday, July 18, 2021

Debt to GDP

 If we add up government debt, corporate debt, and household debt and divide by GPD we get a the following graph:

The total debt/GDP ratio is almost 3 times what it was in 1980.   In 1980 it was possible to survive with high interest rates but today high interest rates with these high debt levels would be horrible. 



Tuesday, July 13, 2021

Last Call for Punch Bowl?


The grey areas in the graph below are recessions.  Note how whenever inflation is above 3% and going up fast it suddenly goes down and there is a recession?   The Fed has to take away the punch bowl as part of its mandate is to control inflation.  When it does this there is a recession.   Note we are above 3% and going up fast.   People think the Fed can keep the same easy money policy for the next two years.  Inflation would be way too high if they do that.  This should be last call for the punch bowl.


Fred Graph of CPI:

 You can also see this in a graph of the PPI:

These two graphs make it look like there should soon be a recession.

However, this time it may not be possible to take away the punch bowl.   The Federal government is spending twice what they get in taxes and has huge debt.  They need the Fed to keep buying their bonds and to keep interest rates low.  If not for the Fed the interest rates would be much higher.  If interest rates on the debt were 5% it would take about half the taxes just to pay the interest.  In this case the Federal spending would be about 4 times the income left after paying interest.    They would be clearly insolvent and nobody would want to buy their bonds.  They really need the Fed to keep buying.   But if the Fed keeps buying then inflation will get out of control.   Probably inflation will get out of control.

It is strange that people can see the government making trillions of new dollars and then be surprised when inflation comes.   If you survey your friends, I bet your Libertarian friends are less surprised than your Democrat friends.

Saturday, July 10, 2021

Shortages and Supply Chain Problems

First, the money creation is much faster than normal as seen in this M1 Money Stock graph.  Does not seem transitory.


If banks pays no interest on money and the prices of things are going up fast, it is  rational to buy stuff needed ahead of time, before prices go up further.  In these conditions, storing real goods is better than storing cash.   Of course this only works for things that you can store for some period of time.   So diapers, cans of tuna, cement blocks, and computer chips, work well, but not bananas.



When money is no longer a good store of value, it is better to store extra value in extra physical things that you know you will use eventually.   This is called a flight into real goods (Flucht in die Sachwerte) or crack-up boomIt is part of "how fiat dies".  We are probably seeing some of this now.

Once public opinion is convinced that the increase in the quantity of money will continue and never come to an end, and that consequently the prices of all commodities and services will not cease to rise, everybody becomes eager to buy as much as possible and to restrict his cash holding to a minimum size. 

You have to look at it from a Game Theory point of view.  The government is printing way too much money.  The value of the money is dropping.  So each player is better off holding real goods than money.   So as each player has extra money, they buy extra stuff, even if they don't need it right away.   Also, if there are shortages and they might not be able to get all they want in the future it is better to order extra stuff now.

If people spend their extra money right away, this has the effect of increasing the velocity of money.   From the Equation of Exchange, we can see that increasing the velocity of money makes prices go up even more. 

You can also see it as an increased demand with no matching increase in supply, so prices should go up.   The supply was enough for regular use but not enough for goods to be used as a store of value.  So it can show up as "shortages".

If many people are ordering extra real good we could expect to see increased demand for shipping.  Sure enough, there is:

Drewry’s composite World Container index:

The above container price index does not look like a "transitory" problem.

Politicians will try to divert blame for the inflation from their money printing to "hoarding" or "panic buying".  The only reason people are buying extra stuff is that the prices are going up fast.  If the government/central-bank stopped printing money the prices would stop going up fast.   The hoarding is a symptom of the inflation (and part of the natural process) and not the core cause of the inflation.

That money is no longer a good store of value is probably the core problem causing the "shortages" and "supply chain" problems.  In the coming months it will become more clear if this is in fact what is going on. 

Tuesday, July 6, 2021

Transitory Hyperinflation



 Bank of America is reported to have said:

On an absolute basis, [inflation] mentions skyrocketed to near record highs from 2011, pointing to at the very least, “transitory” hyper-inflation ahead.


The article also says:

      Because if there is one thing hyperinflation is, it's "transitory."


This was in a phone call and probably B of A wanted to say "high inflation" and not "hyper-inflation".  However, this could be a freudian slip, showing what they really think.
Normal money is both a store of value and a medium of exchange. Hyperinflation is the transitional stage where a money no longer acts as a good store of value but it is so far still being used as a medium of exchange.  Eventually it fails as a medium of exchange also,  and is no longer money.   So fundamentally hyperinflation is the transition period between half dead money and dead money.  It is the process of "How fiat dies".   So as the article says, "if there is one thing hyperinflation is, it's transitory".  :-)



Thursday, June 24, 2021

Money Creation and US Debt


This graph showing log of M2 using Fred data:

Shows that the last year is not normal.

In the past foreigners were buying up and holding US debt but now they are not.

When foreigners were buying and holding US debt the US government deficits did not result in money creation, but if the Fed is buying the debt it is with newly created money.   

Saturday, June 19, 2021

Velocity of Money and Inflation Rate


This graph implies that the velocity of money has some correlation to the inflation rate:


 It makes sense that if there is higher inflation people would not want money to sit around as long.

But it has an even closer correlation with the 10 year treasury rate:

If you understand these two correlations and that the price level partly depends on the velocity of money, you can understand how the inflation genie can be hard to put back in the bottle

 If inflation goes up, then the velocity of money goes up, but this pushes the inflation rate up, ...

Monday, June 14, 2021

Calculating a fair value for Bitcoin or USD


It is common to complain that there is no good way to calculated or even estimate any sort of correct value for Bitcoin.   It is then followed with something like if they can't tell when it is undervalued or overvalued how can they do any sort of value investing?   When should they buy or sell?

Of course, there is much truth to the above argument.   But I would like to explain here why the same argument works for the US dollar.

When the Federal Reserve was created it was supposed to always be able to redeem $20 in paper they had given out for 1 ounce of gold.   In fact, the paper money said "payable on demand".  This means they had to give you gold if you wanted.     So at that time you could think that $20 USD was the same value as 1 ounce of gold.   Now really they printed more money and over time this broke down, eventually dropping any particular exchange rate in 1971.

Today the assets that the Federal Reserve has are mostly bonds in USD.   This means that value of the assets backing the dollar are determined by the future value of the dollar.   So the current value of the dollar is based on the future value of the dollar.   This is recursive and so there is no good calculation for what the value should be.   For example, if we were to get 10% interest rates then the 30 year bonds the Federal Reserve holds are worth far less.   So the assets backing the dollar would be far less, so the value of the dollar would be far less, so the future value of the dollar would be far less, so the current value of the dollar would be far less, etc.   There is no end to the calculation, except that the dollar will eventually go to 0 value.   

There are many different ways to explain possible hyperinflation of the dollar.  In fact, it is normal for fiat/paper money to go to zero.

So there is no good way to calculate the correct value of the dollar.   So people who only feel safe investing when they can calculate the correct value for an asset should not invest in the dollar.   

So far people can say that the dollar is more stable than Bitcoin and they feel safer with a more stable asset.   But the faster it goes down and the faster Bitcoin goes up, the less compelling this argument is.   So as the dollar moves into hyperinflation, I would expect these "I like stability" types to flee the dollar for gold or Bitcoin.   When they finally switch, I expect they will wish they had switched long before.

For Bitcoin to go to zero value you essentially need something enough better than Bitcoin that people switch to it and stop using Bitcoin. 

With Bitcoin/Lightning transactions can be completed in a couple seconds and a penny.   It is hard to imaging how any other coin gets enough better than this to make it worth people's trouble to switch.   If ATMs and Websites are setup to handle Bitcoin/Lightning they probably don't save enough by switching to justify the cost of switching.

I think of money as a sort of game score keeping system.   Bitcoin is a fair score keeping system.  Nobody gets to cheat and make up as many points as they want in the game.   In the US dollar game the Federal-Reserve/US-Government can make up as many points as they want.   It is a "rigged game".   Players all around the world are not getting a fair deal.   It seems for everyone else, other than the US government, you can get a better deal playing the Bitcoin game than the USD game.   Over time I expect people and companies to switch from USD to Bitcoin.

If the users of Bitcoin are increasing then we can say the demand for Bitcoin is increasing.   If the supply is well constrained, then we can expect the price to go up.   We can't calculate what it should be, but in general over time we can say it should, on average, go up, as long as the number of users keeps increasing.

 It seems far more likely that the dollar will go to zero value than that Bitcoin will go to zero value. 


Wednesday, May 19, 2021

Fed Bubble Trouble

 I have tried to explain to friends and family why I think there is a real risk of the stock market dropping by a factor of 4 or more.   It is hard to explain in conversation and it is easy for them to dismiss me.   I decided to put down my thoughts here and see if I can make a more plausible case in writing.  

First I will explain a very simplified model to evaluate a reasonable price of major asset classes.  Then show how interest rates and inflation impact these prices.  Then explain how the Fed can blow bubbles and why they eventually pop.   Then how far down things can go after a pop.

The 3 main investment categories,  bonds, real-estate, and stocks can all be viewed as a future stream of income that you are trying to put a current price on.  The bonds pay interest, the real-estate pays rent, and the stocks will eventually pay dividends (or buy back shares, but lets simplify that out for this).   The bonds state what the payments should be, so the question is just will the issuer of the bonds really pay or will they default.  With real-estate you have to have some idea of what future rents will be, what operating costs will be,  and what percentage of the time it will be rented.  With stocks to have to figure out what the profits for the company will be in the future (and the odds of it surviving) and what that comes to per share.  Fundamentally in each case you are putting a price on a stream of payments.  

There is a "net present value" calculation for what a future stream of payments is worth today.  This depends on the interest rate.   So changes in interest rates change the "net present value" of all 3 of the main investment types.  

By changing the interest rate, the Fed can change the present value of things.  If the Fed lowers the interest rate, the current price of these investments goes up.   This makes people feel richer and they also pay more taxes on profits and such, so it is good for the government too.   

The problem is that by making the interest rates artificially low, the Fed is making the prices of investments artificially high.   The right way to think about this is, "The Fed can blow bubbles".

 The reader may be thinking that they don't do a "net present value" calculation, and that is fine.  But even if you are just using your intuition to decide where to put your money, the interest rates change how good the yields, rents, company earnings of your potential investment seem to be.  For simplification, lets pretend that the neural network in your head does some sort of "net present value" evaluation and interest rates are really important.  This fits with what we see experimentally.  

Many investors will think that these artificially low interest rates can last for the next 30 years, but they can't really.   So the "net present value" calculations are all in error.   They assume some low interest rate for the next 30 years to get the high current price of the investment.   But that was a wrong assumption,  the interest rate won't be low for the next 30 years.  There is a saying, garbage in, garbage out.   The calculation is only as good as the input.   At some point investors realize they need to use a different interest rate and reevaluate what the "net present value" is.   When they calculate with a higher interest rate, the current price calculates lower.  If the interest rate is assumed to go up by a lot, the resulting current price can be far lower.   This is when "the bubble pops".

The Fed was created in 1914 and made lots of new money in the 1920s and kept interest rates down and caused the Roaring 20s where stock prices went up.  Then we got the 1929 stock market crash.  Eventually stocks were down by something like a factor of 8.

In the 1970s when interest rates were high the P/E on stocks was low, like 5.  Today the P/E on stocks is high, like 43 because interest rates are really low.   If people realized that interest rates were going back up to 1970s levels then stocks could go down by a factor of 8.

Because the reader was not investing in stocks in the 1920s and 1930s, and probably not even in the 1970s, this seems too far fetched to be a real concern.   But I think the reader should be concerned. 

You may think, why can't the Fed just keep interest rates artificially low forever?  The reason is inflation.   If they are loaning money at 2% and you can buy copper (or anything) and watch it go up at 6% then so many people would do it that it would go up at 20%.   If they keep printing money once the inflation starts, they can get hyperinflation.  

Recently the inflation index graph is curving up.   The last CPI report was 4.2% for the last 12 months.    People will say there are "base effects" because of the dip in the previous graph.  But that dip means that the next report will be even higher.   It does not imply that future reports are lower though.   If the last few months the CPI index was steady, then after we got past the dip we would have lower inflation (12 month change in index).  But the last few months the CPI index has been going up as fast as it was coming out of the dip.  So the "base effects" argument does not really work. 

It seems we are getting the start of inflation.  If we do get inflation, the stock market could come down by a factor of 4 or more.   There huge trouble is a real possibility.

In The Great Crash 1929 by Galbraith on page 108 it has:

"A common feature of all these earlier troubles [previous panics] was that having happened they were over. The worst was reasonably recognizable as such. The singular feature of the great crash of 1929 was that the worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to insure that as few as possible escaped the common misfortune." 

I fear this crash will be like the 1929 one and would like to warn my friends that although every previous crash in their investing experience was over after a 30% or 50% drop, this one really may not be.   Do not be eager to jump in.   The bottom can be far further down than you think.

The following graph comes from an interesting paper with many other graphs.  The yield is the Earnings divided by price for the stock market (inverse of P/E ratio).   So if you subtract the CPI and plot it you are showing how much above inflation the stock yields should be.  On average it is 4.9% above inflation.   When it gets too low you get the shaded areas that are bear markets.   The inflation rate has gone up since the end of this graph so the current plot would be even lower.   It really seems a bear market should follow.  Just understanding this graph means that as inflation goes up the P/E for stocks will go down.