tag:blogger.com,1999:blog-11027528911364475.post127116921127985736..comments2024-02-18T21:10:05.205-08:00Comments on EconomPic: Is The Earnings-Yield Divergence Unprecedented?Jakehttp://www.blogger.com/profile/07946497592651234440noreply@blogger.comBlogger18125tag:blogger.com,1999:blog-11027528911364475.post-57418434812403190372011-08-17T13:24:23.143-07:002011-08-17T13:24:23.143-07:00Three things:
* Earnings are not guaranteed (they...Three things:<br /><br />* Earnings are not guaranteed (they may grow, they may fall)<br />* A P/E of 20 is very high by historical standards<br />* This assumes the 10 year yield stays at current levels (forward markets are it to rise)Jakehttps://www.blogger.com/profile/07946497592651234440noreply@blogger.comtag:blogger.com,1999:blog-11027528911364475.post-10781771815542778552011-08-17T10:21:00.241-07:002011-08-17T10:21:00.241-07:00The historical Spread Earnings Yield - 10y Treasur...The historical Spread Earnings Yield - 10y Treasuries stands at 2.84. Now the 10y stands at 2.1739. So, a normal Earnings yield should be NOW 5.01 (or a Price Earnings of 20). Which should put S&P at 1623. Instead S&P 500 trades at 1191.60 NOW. All this means stocks are undervalued by roughly 27% as we speak.Anonymoushttps://www.blogger.com/profile/07738689989205725179noreply@blogger.comtag:blogger.com,1999:blog-11027528911364475.post-59147021799397074942011-08-14T18:51:13.146-07:002011-08-14T18:51:13.146-07:00"Unprecedented" is too strong a word for..."Unprecedented" is too strong a word for Felix. But OTOH one shouldn't dismiss a 40-year relationship too glibly.<br /><br />Lots of things happened circa 1970. For one that comes to mind right away, Nixon closed the gold window. That had a signifcant permanent impact on interest rate behavior.Jim Glassnoreply@blogger.comtag:blogger.com,1999:blog-11027528911364475.post-68692252500287868312011-08-13T13:56:19.821-07:002011-08-13T13:56:19.821-07:00Alex- fixed. Thanks.Alex- fixed. Thanks.Jakehttps://www.blogger.com/profile/07946497592651234440noreply@blogger.comtag:blogger.com,1999:blog-11027528911364475.post-87893390595266206322011-08-13T13:34:15.920-07:002011-08-13T13:34:15.920-07:00Very interesting.Very interesting.EconomicDisconnecthttps://www.blogger.com/profile/02802078645713106743noreply@blogger.comtag:blogger.com,1999:blog-11027528911364475.post-70216853002786628302011-08-13T12:54:22.310-07:002011-08-13T12:54:22.310-07:00Whatever the explanation for the recent convergenc...Whatever the explanation for the recent convergence, using the term "historically utterly unprecedented" to refer to the last 40 years is a very serious error for a professional journalist. Felix dropped his pants on this one.John Fischerhttps://www.blogger.com/profile/10449844868098492351noreply@blogger.comtag:blogger.com,1999:blog-11027528911364475.post-36386647086466397662011-08-13T12:16:54.079-07:002011-08-13T12:16:54.079-07:00Oh, BTW, the link you give to the Felix Salmon pos...Oh, BTW, the link you give to the Felix Salmon post you're commenting on is broken. Presumably you meant <a href="http://blogs.reuters.com/felix-salmon/2011/08/12/chart-of-the-day-the-great-earnings-yield-divergence/" rel="nofollow">this</a>.Alexhttps://www.blogger.com/profile/03849375466967362511noreply@blogger.comtag:blogger.com,1999:blog-11027528911364475.post-21410406571096979242011-08-13T12:08:45.035-07:002011-08-13T12:08:45.035-07:00All sorts of reasons, good ones already put forwar...All sorts of reasons, good ones already put forward, and here are some more:<br /><br /> a) removal of gold convertibility <br /> b) rise of pension & insurance funds who require stable returns, but higher than the absolute terms the risk-free market can offer (particularly now with ZIRP)<br /><br />As for MPT debunked, it's provided increasingly better returns in this decade & the last as bonds have smoothed out the mammoth equity volatility.<br /><br /><br />-MMatt Busiginhttps://www.blogger.com/profile/03262179214077430841noreply@blogger.comtag:blogger.com,1999:blog-11027528911364475.post-60136058265286231322011-08-13T11:48:27.229-07:002011-08-13T11:48:27.229-07:00I bet he means unprecedented since the US dollar b...I bet he means unprecedented since the US dollar became a fiat currency. I am having trouble finding it, but it would be interesting to see the trading volumes over that historical range. Do they start to rise shortly before the US went off the gold standard?Alexhttps://www.blogger.com/profile/03849375466967362511noreply@blogger.comtag:blogger.com,1999:blog-11027528911364475.post-20616747314238815322011-08-13T11:00:24.141-07:002011-08-13T11:00:24.141-07:00No, but Walmart is borrowing long term debt at 3% ...No, but Walmart is borrowing long term debt at 3% and buying back its stock with an earnings yield of 10%. <br /><br />GE, Radio Corp of America, and US Steel could have done the same thing in 1936, but they were unaware of the advantage.Nick Rnoreply@blogger.comtag:blogger.com,1999:blog-11027528911364475.post-26145765813792631842011-08-13T10:25:05.193-07:002011-08-13T10:25:05.193-07:00In other words, if a corporation can borrow at 5% ...In other words, if a corporation can borrow at 5% and get a return of 6% on their stock buyback... do it.Jakehttps://www.blogger.com/profile/07946497592651234440noreply@blogger.comtag:blogger.com,1999:blog-11027528911364475.post-39928621584419597282011-08-13T08:47:54.228-07:002011-08-13T08:47:54.228-07:00It's not just arbitrage trading that drives th...It's not just arbitrage trading that drives the modern relationship. Corporations are far more likely to buy back stock today as well as engage in LBOs, MBOs, private equity spinoffs, junk bond financing, etc. This is the "real arb" that prevents the equity/bond yield differential from blowing out in liquidity trap conditions.<br /><br />This corporate behavior was largely absent pre-1970. Interesting, this real arb is far less common in Japan, and Japan's spread is far more reminiscent of the 1930s.NIck R -- Kyoto, Japannoreply@blogger.comtag:blogger.com,1999:blog-11027528911364475.post-33788491753336762152011-08-13T01:22:36.765-07:002011-08-13T01:22:36.765-07:00Debunked? I dunno, maybe.
Taleb seems to think s...Debunked? I dunno, maybe. <br /><br />Taleb seems to think so. He thinks they were never bunked in the first place and has said that MPT and the like have made the system inherently more unstable.Sprizousehttps://www.blogger.com/profile/06764449113845175440noreply@blogger.comtag:blogger.com,1999:blog-11027528911364475.post-44901485110680068052011-08-13T01:09:49.383-07:002011-08-13T01:09:49.383-07:00So... if Markowitz and CAPM are debunked, the rela...So... if Markowitz and CAPM are debunked, the relationship could in theory break down. Interesting....Jakehttps://www.blogger.com/profile/07946497592651234440noreply@blogger.comtag:blogger.com,1999:blog-11027528911364475.post-82477282333697788452011-08-13T01:08:33.141-07:002011-08-13T01:08:33.141-07:00Got it... that makes a lot of sense.Got it... that makes a lot of sense.Jakehttps://www.blogger.com/profile/07946497592651234440noreply@blogger.comtag:blogger.com,1999:blog-11027528911364475.post-50206853320002633072011-08-13T01:04:07.208-07:002011-08-13T01:04:07.208-07:00I should have clarified... if you're looking f...I should have clarified... if you're looking for a rise of the tight coupling seen starting in the 1970's then algorithms based on Markowitz's work is probably the reason. MPT didn't become popular until the 70s, but once it did, it created what you're seeing in the chart. <br /><br />MPT and Markowitz's work were then used by arbitrageurs (who also used Black & Scholes' work) to price everything 'efficiently'. Of course, the efficiency of it only made sure that option prices or that portfolio's hewed to the standards set forth by mathemeticians.Sprizousehttps://www.blogger.com/profile/06764449113845175440noreply@blogger.comtag:blogger.com,1999:blog-11027528911364475.post-70304842999526885352011-08-13T00:45:58.846-07:002011-08-13T00:45:58.846-07:00I think arb trading wasn't really in full scal...I think arb trading wasn't really in full scale until the late 1980's / early 1990's, but I could be wrong. What I do know is that back in the day is was thought that it was an impossibility that stocks could earn less than Treasuries because they were more risky. Apparently investors assuming that was a temporary phenomenon blew themselves up in the 1950's.<br /><br />Some other thoughts of what made equities more attractive:<br /><br />* Demographics (i.e. baby boomers - younger folk have a higher demand for equities)<br />* The growth of retail investing (i.e good marketing)<br />* Inflation concerns beginning in the 1970'sJakehttps://www.blogger.com/profile/07946497592651234440noreply@blogger.comtag:blogger.com,1999:blog-11027528911364475.post-91922096583427641282011-08-12T23:39:30.766-07:002011-08-12T23:39:30.766-07:00Is it possible that the rise of arbitrage trading ...Is it possible that the rise of arbitrage trading -- using computerized algorithms and real-time data -- is the reason your pre-1975 charts are not an accurate reflection of modern markets?Sprizousehttps://www.blogger.com/profile/06764449113845175440noreply@blogger.com