I think it is highly likely that the numerator shrinks by 35-50% over the next 2-3 years while credit markets contract again. At present we have a 4.5 year-old bull market that has reached an extreme in valuation, coinciding with investor complacency, rising Treasury rates, and a slowing economy.

Corporate profit margins are highly elevated and due to revert to the mean during any cyclical bear market. That said, we’re talking about the Shiller PE, so a drop in earnings for a couple of years won’t have a great effect on the denominator.

After such a washout with more debt writedowns and a restoration of value, the conditions may be set for credit expansion and an increase in monetary velocity. We have no reason to believe that central banks will be any less eager to print, but such printing doesn’t directly create inflation. That takes a change in risk appetite and cleaner balance sheets.

What makes a secular bull is profit growth plus multiple expansion as inflation and fear subside. Right now we are near the top of the profit growth channel, with a very high multiple on elevated profits. We’ll eventually experience the opposite, and I think I will be able to recognize it when I see it, but how and when we get there is foggy.