Source: www.TheChartStore.com

Now if you had 30% idle capacity, no way to increase sales or prices, and were facing rising input (raw material) costs, what would do that to your margins? Exactly.

How could capacity utilization increase?

1. Demand and hence production goes up (unlikely, given the state of the US consumer)
2. Capacity gets “destroyed” (bankruptcy or plant closures): government interferes (bail-out of large companies)

Again, not a good outlook for equities.

You would think that, under these circumstances, equities were cheap. Not according to this graph:

Source: www.TheChartStore.com

Looking at this chart it becomes evident that equities are not cheap, but three times more expensive relative to earnings since more than 60 years.

Interest rates are low (= high inverse yield in this chart), but there is no point in the last 60 years which could act as a reference for the current dissonance. This suggests something will have to give.