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Profit from Inflation

It has been a long time since developed nations have tasted serious inflation. Unless you are near 60 or older you will not have experienced the last time inflation was a serious issue in the 1970s into the early 1980s. 

Coupled with low inflation is low interest rates. It is hard to miss the pattern of interest rates since 1982. Each increase in interest rates was followed by a new low in interest rates until we bumped against zero and stayed there for much of the past decade. 

The stock market loves low interest rates. The constantly declining interest rates gave us a stock market that has relentlessly climbed. In the early 1980s the price/earnings (p/e) ratio for large capitalization stocks was in the single digits and the dividend yield was in the 6% vicinity. Now the p/e multiple is closer to 30 and the dividend yield is below 2%. 

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Does the Minimum Wage Cause Inflation or Unemployment

Economic growth is pushing towards 10 years as of this writing. The 2008-09 recession was deep and slow in recovery. Fewer jobs at lower wages coupled with the long time frame unemployed people had to wait to even get a job at any wage caused tempers to flare. The minimum wage was raised in 2007, 2008 and 2009 to the current federal rate we have today.

Jobs available as the recession eased were not the same quality as jobs lost. More workers were among the working poor, earning minimum wage or close to it. Eventually a vocal crowd demanded a $15 an hour minimum wage. It all sounded good. And fair to workers making less. Business owners also made powerful points. In the end nothing of consequence came of the movement. The expanding economy lifted more wages, nullifying the demands of the activists. Better jobs with higher wages started appearing, too. People used to a higher income had greater opportunity to explore a pay increase at a new employer if the current employer didn’t increase wages.

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Could We Get a Single Digit P/E Ratio?

Recent volatility and decline in the broad markets in the U.S has people wondering if the correction returned the market to typical valuations. There are several tools used to measure the market’s value. One of the most widely used is the price/earnings (P/E) ratio, derived by dividing a stock’s price by its trailing twelve months (TTM) earnings.

The P/E ratio on the S&P 500 stands at 24.46 as I write (February 11, 2018). The ratio has been above 20 since early 2015.

When you take long periods of market data and shake them together you end up with an average P/E somewhere in the mid-teens. There is no hard and fast rule stating what a fair or reasonable P/E should be though plenty of opinions exist.

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The Real Reason the Stock Market is Going Up

After nine years of steady growth in the economy and stock market both indicators have taken a sharp turn north. Economic stimulus in the form of tax cuts in an already good economy holds the possibility of destabilizing the whole economic structure.

There is ample concern over the staying power of the advancing stock market. Valuations are at or near record highs in all measures. All news seems to be good news. Predictions for future gains have reached nosebleed territory.

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How Fast Does Inflation Rise?

Media continually warns of impending inflation due to all the money printing by central banks around the world. The concern is real. If inflation spikes bonds will suffer massive loses and stocks will also suffer a painful decline. It is past time we look at the facts about inflation, how fast it rises, and what causes prices to spike.

Planning for retirement and when reviewing investments, inflation is a consideration. A review of historical inflation data will help in the decision-making process. By reviewing the historical data also clearly shows why inflation accelerates, including solutions to protect yourself. We will focus on inflation data in the U.S. I have reviewed price data for other countries and further back than the U.S. data. The conclusions are the same.

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