The ‘Broken’ Fed Model In 3 Simple Charts
from Zero Hedge
One of the most commonly cited ‘bullish’ memes for stocks is the so-called Fed Model (or Equity Risk Premium) or more simply – the fact that earnings yields are not catching up to Treasury yields (i.e. why put your money in government bonds at such low rates when there is smorgasbord of yummy equities with ‘attractive’ dividend yields). There are three key problems with this perspective: 1) No concept of ‘risk’ is imbibed in this return-based differential (as we have discussed before here and here); 2) Longer-term historical context is critical (as we discussed here – must read); and most importantly 3) Financial Repression breaks the ‘Fed Model’. As Barclays shows in the following three charts (and we pointed out recently) normalization of the equity risk premium will not occur until Financial Repression ends.
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2012-11-16 03:41:29
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