For instance, Robert Shiller (of CAPE fame) has been writing recently about what he refers to as "excess cape yield" (ECY). It's a bit of a twist on the old idea of the "Fed model," essentially a somewhat simplistic metric for judging whether equity markets are fairly valued by taking into account trend 10-year T-note rates.
https://en.wikipedia.org/wiki/Fed_model
Originally Posted by CaptainMidnight
.
Just saw this earlier today ...
Speaking of Robert Shiller's modified index (as I was in post #150), here's a fuller discussion of the issue along with the famed economist's current thoughts:
https://americanconsequences.com/mak...-stock-prices/
.
Originally Posted by CaptainMidnight
Using Shiller's 10 year average P/E as a measure as to whether a market is overvalued or undervalued makes sense to me. The ECY does not, and looks more like a way to explain current high valuations. I suspect it doesn't hold across long time periods in multiple markets. Japan may be a poster child. The P/E of the Nikkei hasn't been hugely higher than ours, unless you go back to the early 2000's. I don't know what comparative 10 year real bond yields have been for the U.S. vs. Japan, but suspect not low enough to justify "low" Japanese P/E's. If you've got real rates close to "0", then based on the Wikipedia article (not the same as ECY, but similar reasoning), shouldn't stocks sell for infinity? Same argument more recently for Germany.
OK, I haven't been particularly aware of 10 year real bond yields in emerging markets when currency and economic crises were occurring. But I remember plenty of situations when interest rates go sky high, much higher than inflation, oftentimes because of pressure from the IMF. Equities plunge, because the economy goes into recession, earnings plunge, many companies have problems repaying debt. But, perhaps more importantly, who's going to buy shares selling for mid-cycle P/E's of 3 (earnings yield of 33%) when you can get 50% interest rates on local currency government bonds? I lived through something like that when working in Indonesia, and it was the ideal time to buy shares. You could have made a bundle and I did. Something similar happened in Argentina, Russia, Brazil and other markets over the last 20 years. Now maybe ECY still works for these examples -- again I wasn't following long term real rates. Still, intuitively, this looks like something that explains the present well but may not stand up to the test of time.
