Why does this chart matter to investors?
Imagine a town that produces 100 pizzas a year. Each pizza costs $10. The town's "GDP" is $1,000.
Next year, the town will still produce 100 pizzas. But now each pizza costs $15.
The town's GDP is now $1,500. Did the town get richer?
No. It made the exact same number of pizzas. It just used more dollars to count them.
That's asset price inflation. And that's what the gap in this chart represents.
While did experience economic inflation in the past the GAP did not form. Why? Bc the earnings yield, Bond yields, and inflation were more in line with each other. That kept the real and nominal economy in balance. Not this time.
Multiple expansions end badly! Because they don't buy more earnings growth in the future. What they actually do is pull future earnings FROM THE future into today. That means markets will ultimately have to pay the piper. What is trading for 40 PE today in the future will pay 20!
Do not make the mistake of believing this is only a 50% decline in markets bc 20 is half of 40. That assumes earnings can maintain the current levels of profits. I assure you in a recession that will NOT be the case.
Which is exactly where we are now.
The 2020-2021 expansion pulled an enormous amount of future returns into the present. The question isn't whether multiples contract — it's when and how fast.
That is private information. Sorry! ((
If you enjoy the work:
👉 Drop a solid comment
Let’s push it to 7,000 and keep building a community grounded in truth, not hype.
Imagine a town that produces 100 pizzas a year. Each pizza costs $10. The town's "GDP" is $1,000.
Next year, the town will still produce 100 pizzas. But now each pizza costs $15.
The town's GDP is now $1,500. Did the town get richer?
No. It made the exact same number of pizzas. It just used more dollars to count them.
That's asset price inflation. And that's what the gap in this chart represents.
While did experience economic inflation in the past the GAP did not form. Why? Bc the earnings yield, Bond yields, and inflation were more in line with each other. That kept the real and nominal economy in balance. Not this time.
Multiple expansions end badly! Because they don't buy more earnings growth in the future. What they actually do is pull future earnings FROM THE future into today. That means markets will ultimately have to pay the piper. What is trading for 40 PE today in the future will pay 20!
Do not make the mistake of believing this is only a 50% decline in markets bc 20 is half of 40. That assumes earnings can maintain the current levels of profits. I assure you in a recession that will NOT be the case.
Which is exactly where we are now.
The 2020-2021 expansion pulled an enormous amount of future returns into the present. The question isn't whether multiples contract — it's when and how fast.
That is private information. Sorry! ((
If you enjoy the work:
👉 Drop a solid comment
Let’s push it to 7,000 and keep building a community grounded in truth, not hype.
Real Macro Economic Investing
patreon.com/Realmacro
patreon.com/Realmacro
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
Real Macro Economic Investing
patreon.com/Realmacro
patreon.com/Realmacro
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.