“Davidson” submits
The Dallas Fed released its 12mo Trimmed Mean PCE inflation index for Nov 2010 with a reading of 0.8%-2mos in a row. Although the Chairman Bernanke is attempting to reflate this to 2% with QEII, it remains quite tame. My observations of various factors in play at this period indicate that disinflationary tendencies are more likely than not the rule for some period as individuals and corporations pay down debt and businesses increasingly accept Lean Mfg practices as a means of recovering global competitiveness. Low inflation with improvements to the balance of trade could prove to be an enduring feature of the 2008 collapse even though much of the Lean Mfg practice implementation occurred well before the downturn. Lean Mfg practice takes ~2yrs for an initial effect with dramatic effects becoming evident in ~5yrs if performed correctly. After the first 5yrs, Lean Mfg provides continuous improvement annually and can double the profitability of companies achieved the first 5yrs in the next 5yrs.
Should disinflation continue and the Market Cap Rate persist near the current ~4% range then investors could justify paying much higher valuations. There is a strong correlation between Market Cap Rate and SP500 Mean Earnings Yield over time, but significant trends do not cause investors to change perceptions rapidly which have been embedded by 10yr-20yrs of market experience. But, if 1982 is a viable example, then 4yrs of Market Cap Rates at the current level could have a significant impact on investor psychology and market valuation.
