Interesting quote from Bengen during the interview with regard to high CAPE and high inflation, and the predictive power of looking at both together..
Bengen: Back in 2008, Michael Kitces, a renowned advisor, developed a chart which showed there was a strong correlation between stock market valuation, or CAPE, and the safe withdrawal rate for a particular year. I thought that was an amazing discovery. When you look at it closely though, it's very hard to use the CAPE to predict what a safe withdrawal rate is, because it's only about a 74%, 75% correlation. And you can choose several years that had identical market valuations and have a variation of up to 50% in the safe withdrawal rate. So, although it was a big step forward, it wasn't enough to provide predictive power. Last summer, I made a breakthrough when I found that if you add inflation, the starting inflation regime, into the picture, you get a much higher correlation. And using stock market valuation and using inflation together, you get a really good fix on what a safe withdrawal rate should be, at least historically.
When I took a look at the data, I discovered that you could aggregate withdrawal rates by inflation rate--the starting inflation rate creates what I call six inflation regimes. Each regime is about 2.5 points of inflation, like a low inflation regime would be from 0% inflation to 2.5%; modern inflation would be 2.5% to 5%, and so on. You could divide all the historical data into six inflation regimes. And when you sort that, and then within that, by the Shiller CAPE, it's an astoundingly close correlation. When you have low inflation and you have cheap stock market valuations is when you get your very high withdrawal rates as high as 13%, historically. And when you get a scenario like you had in the late ‘60s, early ‘70s, when you have high inflation and coming off high stock valuations, that's when you had your worst withdrawal rates. So, that's the framework that has emerged from all this work.
FWIW..I do think inflation (and Fed actions to combat said inflation) will play a major and likely adverse role with regard to equity valuations in 22. And since we're going into 2022 with the second highest CAPE 10 ever, it does appear that a perfect storm of sorts is brewing..