The Effect of High Equity Valuations and an Acceleration in the Rate of Inflation

Also from Hussman Funds. Scroll down to the chart showing instances since 1965 "where inflation in the PPI Index was above 3 percent, the most recent PPI value was at least 60 percent above its 18-month moving average, and the cyclically-adjusted P/E ratio was above 16."

Uniformly the effect is very bearish. The hypothesis is that it is "inflation rising faster than its recent trend - sparking concerns of higher longer-term inflation - that increases risk aversion among investors. When these periods occur alongside high P/E ratios, the contraction in multiples has usually been substantial..."

This is something I brought up in November 2010: inflation is bad, not good, for stock prices. I explained that inflation would cause earnings multiples to contract and it would decrease the earnings of many firms.