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QUESTION: Mr. Armstrong could you expand your analysis of this statement [STAGFLATION]. You indicate  that demand will decrease and cost will increase.
Does this not all lead to lower or stagnant corporate earnings?

Yet you expect higher asset prices including stocks. If equity ownership is a call on future earnings which are stagnant or declining why will equity prices increase? Will they rise simply from demand with no consideration to value or the competition of rising rates?

By some analysis the expected return from equities for the next 10 years( based on earnings growth) is no greater than the return from a 10 year Treasury. Can you comment on this statement and why stock prices will rise if the analysis is correct?

The expectation of rising rates is that for Public as well as Private debt, and how will it affect the yield curve?

Do you expect short term rates to rise as well?

Best Regards, RC


ANSWER: Equities rise sometimes for earnings and at other times for capital appreciation. This is the problem with ALL fundamental analysis. It attempts to reduce everything to a single one-dimensional cause and effect. We live in a multi-dimensional world where the cause behind each effect can vary tremendously based upon the COMBINATION of trends. The Price Earnings Ratio from July 1929 into the September 1929 high went NEGATIVE as the price advanced 163%.


From the March 1937 top to the lows seen in April 1938, the Dow declined 47% as earnings fell only 12% from October 1937 to April 1938. Over the next 10 years, covering the war, if you bought the Dow based upon earnings you would have lost money. If you had then sold the Dow when earnings rose, and bought the Dow back on falling earnings, you would have outperformed the market. Clearly, trading based upon PE ratios is about as consistent as trading with the rise and fall of women’s skirts. It may sound logical, but that is one-dimensional and will fail.


The PUBLIC WAVE began in 1934 and ended in 1985. Hence, the confidence shifted to government and this led to the huge stagnation in equity values that resulted in the take-over boom. The book value bottomed in 1977. Those who attempt to publish analysis arguing that the return from equities for the next 10 years will be no greater than the return from a 10 year Treasury, have absolutely no understanding of markets and in their one-dimensional world they think everything reaches some perfect state of harmony. It is irrelevant!! Stocks rise either (1) for earnings when interest is lower, and (2) stocks rise as an alternative to banks – capital appreciation.

The expectation of rising rates is on the horizon will be for Public as well as Private debt. However, those rates will rise as capital is forced into the market for higher yields and CAPITAL APPRECIATION. The lower rates in government debt and bank deposits is forcing capital out into the equity markets. Short-term rates will rise but they will NOT impact stocks until the rate of interest exceeds the expected return on equity be it through dividends or capital appreciation.