In my recent Inflation and the Cyclical P/E10 article, I featured a scatter chart showing the correlation between inflation and the cyclical P/E10 ratio. The chart triggered several emails asking two things: 1) Why the loop of high P/E10 dots in the center of the chart? 2) Where are we today in the chart?

Here is a color coded version that highlights the rate of inflation/deflation, and I've also added lines to the scatter points to show the chronology of the period from May 1997 to March 2003. The result underscores the accuracy of the metaphoric phrase Tech Bubble. I've also added a pointer to show the latest data point — where we are today.

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As we can see, the Tech Bubble was an obvious valuation outlier — one that was no doubt made possible by the low interest-rates of the Great Moderation. It's difficult to imagine such lofty cyclical P/Es in a time of high inflation or deflation.