You’re sure to get price/earnings multiple compression during periods of inflation.

One reason is that money will flow into commodities (and other hard assets).

start here: “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose. ” – John Maynard Keynes, The Economic Consequences of the Peace, (1919), p.236.

add in ‘Substitution effects’ by end customers..

and you get a whole new dynamic, one very different from a simple ‘marking-up’ of the Balance Sheet of each and every..

further, Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth.–JMK paraphrasing Lenin..

Theoretically, equity represents a piece of a real asset – just like real estate or commodities.
Also, theoretically, the average company would probably increase their sales by the inflation amount, but would see their cost go up by the same inflation amount. As a result their profit would go up by the inflation amount. And finally their shareprice – assuming same capital structure and multiple – would go up by that amount. So in the end, I end up in the same place.

What is the counter argument?

I don’t get this math. S&P500 appreciation is about 34% without calculating dividends in this example. CPI inflation from ’74-’82 was around 50%. So if you started with $100,000 and grew to $134,000 plus another $10,000 for dividends, you’ve got $144,000. If inflation robbed you of 50% then you have $72,000 in real terms. That means you lost 28% of your money not 75%.

That’s still bad but compare it to a T-Bond in 1974 with a 7% coupon. After taxes and inflation, the real loss was far greater.

http://moneyneversleepsblog.blogspot.com/2009/04/is-this-another-bear-market-rally-does.html

clearly, it was a real rally if you got in early and were primed to sell. 20% is a nice month’s work! and nearly all of a market’s annual returns are made off a few dozen trading days; the rest is just churn. finding a bottom is just code for finding a day that you can buy and quit watching the prices every day.

if you’d like to find a shady place to park your nest egg, then … suckers are not made by buying, but by not holding long enough. or so one theory goes. just throw a dart at the calendar, go all in on that day, and you’re done.

in those terms: i can’t find a bottom, because i can’t stop watching events unfold — i don’t trust the players and i fear the landscape. and i can’t just hold, because the landscape foretells a long and dreary interval of volatility without trend.

most of all, i don’t feel we are ever going to get timely disclosure and transparency, and i don’t trust the government to take aggressive action short of a crisis forcing its hand. so no — no bottom for me.

Well, if investors assume the first week of March 2009 was the “low,” then according to your stats, we might be in for a sustained rally. (In fact, that is what appears to be happening right now. ) But then you then say that the actual returns were diluted by inflation, causing investors to lose money.

According to your numbers, an investor who got in at the low would still be up around 33%. To reach your conclusion, inflation would have to be over 33% during that time period to cause a real loss. How many years are we talking about here? And do you really see that kind of inflation happening in the U.S.? America does not have an enemy country capable of attacking America’s shores to spur the massive war time spending that usually accompanies such inflation and full employment. (Note: I said country, not individuals.) I don’t rule out a Gulf of Tonkin incident, but I also don’t see that happening under Obama’s less neoconservative administration. As such, I don’t see inflation posing a massive threat over the next five to ten years, certainly not in the range of a 33% jump.

re: ZH, you go w/: “On the down side, I’m not smart enough to understand everything he writes. I think it’s more how he says it than what he says.”

As always, if you have Q:’s, Ask.

from what I’ve seen on those threads, many do, and are not received w/ hostility, in the least.

past that, one can, always, ask elsewhere..just remember: “Context is Key”.

The model portfolio is currently in a market neutral stance with about 40% of capital in cash. (Up 29% over the past 52 weeks)

If you are bullish, you love the market’s technical measures of late…
1) the bounty of 10:1 Up/Down volume days since March 1. Price/Volume (supply/demand) is definitely bullish for the past several weeks.
2) You will also note that Swenlin’s award winnin Thrust/Trend Model shows an increasing number of stocks showing bullish price behavior, and the general market’s intermediate term trend is now up for the first time in over a year.
3) Also, fewer new lows each time the market makes a new low showed a bullish divergence in March (although also November).
4) Finally, the market has held up well and even rallied in the face of bad news.

If you are bearish, you will focus on the lousy fundamentals…
1) The suspect volume on rallies.
2) the expected increase in foreclosures (both residential and commercial RE)
3) the drunken money creation via the US Treasury and the Fed.
4) the coming financial tsunami in Europe, emerging markets, etc.
5) the ongoing D-cycle