I had an interesting conversation with a young man out on the campaign trail yesterday about stocks and the economy. He started out trying to convince me that Apple was an amazing investment prospect. He made points such as:

A) Excluding cash on hand Apple’s P.E. ratio is 5
B) At Apple’s current cash accumulation rate they will have more cash than the company’s worth in 4 years (can’t remember what the actual number was, but it was something really low)

As the conversation continued I asked him about his thoughts about inflation of the U.S. dollar, to which he summarily dismissed the prospect pointing out:

C) Long term mortgage rates are at 3.0% – obviously the market is not concerned about inflation so neither am I

So he was perfectly happy to accept that the market was right on inflation, but refused to see the 5 P.E. ratio assigned to Apple stock as the market being right on its long term growth prospects (which it clearly thinks are not good).

Can anyone give me a good theory explaining why the free market is right about inflation, but wrong about Apple? It seems to me that buying Apple stock expecting growth is the same as taking out a big loan expecting inflation.