Thanks for the thoughtful and thorough response. I hope I’m not becoming a bore on this topic… I keep bringing it up, you keep graciously responding ‘stag-lite’.

Presuming consumer goods inflation in tandem with asset deflation seems a pretty safe investment theme to have. I’ve mentioned I-bonds previously, and it occurs to me they should do OK in that type of environment.

As for equities generally, I am being very cautious. James’ position resonates with me. And it doesn’t depend on a full-blown 70′s stagflation to cause a note-worthy correction.

Again thanks David. And thanks James.

(BTW, I’m in the East-coast time zone this week and next.)

I agree with most of your post with one caveat – valuation. I’ve posted before and not yet seen a response from you regarding the great valuation debate! Valuations mean little in the short to intermediate term, but it is what drives long term returns. I know you have argued that profit margins could sustain higher levels for longer than most think, but don’t the macro numbers from Q3 and likely now Q4 suggest your assessment was wrong? Margins are clearly contracting and with the implosion continuing in the credit markets, it is hard to see how financial sector profits will reverse quickly. In fact, I have posted and argued that profits from the past few years will be written down like the profits of the late 1990′s (for different reasons obviously) and that the record profit margins will end up having been a fantasy.

So with price to book and most importantly to me, price to sales WAY above long term median/average levels, how can one argue that stocks in general are fairly valued or cheap? Margins would have to stay high for a long time, but that defies a basic tenet for me of a margin of error. I see a lot of lazy (and I am NOT including you in that group) of analysis regarding valuation using purely a P/E or Fed model analysis but have yet to find someone willing/able to posit an argument against my view other than “higher margins”. I would really value any response from anyone reading the blog because I constantly try to prevent myself from becoming dogmatic.