Thomas Tooke

Impoverishment of the population, interest rates and Stock PE leading to Genoa Convention

In Inflationary Period of 1913-1920 on April 22, 2012 at 6:38 pm

As was discussed before, wages were not tracking the inflation of necessities, utility rates were repressed during 1913-1920.

From a practical  investment standpoint, it raises a lot of questions about buying consumer oriented stocks at high multiples, if the real disposable income ex increasing price of necessities is actually declining. Specially in the context of likely compressed valuation multiples and rates which can not go down further today. We will discuss the interest rate policy of the time later because it is so similar to today´s situation, but in the meantime have a look at interest rates direction and multiples on stocks until something was done about inflation and artificially low interest rates at the time. The data is public data compiled by Professor Robert Shiller.

While multiples on stock contracted severly from 1901 until the end of the inflation period, again as a reminder here is what happened with commodities. This phenomenon is actually very similar to what happened to commodities, PE on stocks and interest rates in the late 1970s beginning 1980s.


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