Chart of the day: The great earnings-yield divergence

By Felix Salmon
August 12, 2011
post on Monday about the huge divergence in yields between stocks and bonds, I wondered just how historically unprecedented this divergence was.

" data-share-img="" data-share="twitter,facebook,linkedin,reddit,google" data-share-count="true">

US_SP10YT0811_SC.jpg

After I wrote my post on Monday about the huge divergence in yields between stocks and bonds, I wondered just how historically unprecedented this divergence was. And now, with the help of this fabulous chart (many thanks to Nick Rizzo, Dan Burns, and Stephen Culp), it’s pretty easy to see: we’re at levels which match those at the height of the financial crisis, and which are otherwise historically utterly unprecedented.

Indeed, from 1985 through about 2002, it was just as common for the S&P earnings yield to be lower than the Treasury yield as it was for the yields to be the other way around. The two tracked each other, and the spread between them almost never moved beyond 2 percentage points either way.

In 2002, everything changed. The spread between the two jumped up to a very high level and stayed there, all the way through the onset of the financial crisis. This was the Great Moderation.

And when the Great Moderation imploded, the spread only widened further. Today, it’s about 7 percentage points. At these levels, it’s almost impossible to see how stocks could possibly be a worse long-term investment than bonds. Yes, earnings can fall. But even if they fall in half, stocks will still yield double what bonds do.

I have to admit that I really don’t understand what’s going on in this chart at all. While any given spike can always be attributed to a fearful flight to quality, that doesn’t explain the decade-long trend.

There does seem to be a feeling in the markets that current earnings levels are somehow illusory — a feeling which long predates fears of a double-dip recession. I’m not so sure about that: while earnings are surely cyclical, in the grand scheme of things corporations seem to be doing much better when it comes to earnings growth than individuals are, and I don’t see that trend reversing itself any time soon.

Even QE2 doesn’t seem to have helped on this front: while it boosted all asset classes, bonds seem to have been the primary recipients of the Fed’s flows, with stocks lagging behind.

So with the explicit proviso that I’m not going to try to explain this graph, I’ll tentatively put forward one hypothesis: that the dot-com bust of 2000-2002 had a much bigger effect on stock-market psychology than we might have thought. It made stock investors realize how fragile stocks really are, and concentrate on the risk that they could fall substantially in price. If you’re think that stocks are going to fall, then it almost doesn’t matter what their earnings yield is — you feel as though you should sell them at any price.

But frankly I don’t really believe it. There’s something more profound going on here; I just can’t put my finger on what it is.

Even without understanding what’s going on in this chart, though, it does seem to say quite clearly that now’s a good time to buy stocks, if only because the opportunity cost of not buying stocks is so enormous. Bonds and cash yield nothing: it’s really hard to see how they can be a better bet than stocks over the medium to long term. Which is not to say that stocks can’t fall, of course: they can. They can fall a lot. I’m not trying to time the market here. But the chart is striking, all the same.

38 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

The chart suggests a decade-long trend of the markets preferring the 10-year to equities, but the chart doesn’t explain who ‘the market’ is. And I think searching for, and finding, buyers who prefer these different securities (and the capital each of these classes of investors have to throw around and affect the market) is where the answer lies.

For instance… might stagnating real incomes for ordinary Americans over the last ten years have something to do with the lack of investment in equities? Or how about an aging population naturally shifting to capital preservation? Or, how about sovereign wealth funds and foreign investors? Are they matched 50/50 equities to treasuries? I don’t have the data, but my guess is no. And my guess is all three of these (and perhaps more factors) are playing a role.

Posted by Sprizouse | Report as abusive

With a bond, you are guaranteed to get back your principal in addition to the interest (unless there is a default). With stocks, there is a risk that you will not get back your “principal” in full, or at all. Because of this risk, stocks routinely paid much higher dividends than did bonds throughout the 1950s until the late 70s and early 80s. BTW, the high dividend payment, reinvested during this golden era of the 1950s-through the late 1970s, explains most of the “Stocks for the Long Run” gains explained by Segal in his famous book. Too bad it pertains only weakly today, if at all…

Posted by maynardGkeynes | Report as abusive

this argument is better made, in my opinion, with dividend yield than with earnings yield, which was the gist of my post today, Felix.

http://kiddynamitesworld.com/sp-500-yiel d-exceeds-10-year-us-treasury-yield/

Posted by KidDynamite | Report as abusive

“At these levels, it’s almost impossible to see how stocks could possibly be a worse long-term investment than bonds. Yes, earnings can fall. But even if they fall in half, stocks will still yield double what bonds do.”

Exactly. As of today, my retirement accounts (with a balance that is 30x ongoing contributions) are 100% invested in stocks, 0% in bonds. For better or for worse, I am putting my money on that assessment. All of it.

“While any given spike can always be attributed to a fearful flight to quality, that doesn’t explain the decade-long trend.”

Felix, look back at what you have written in the last few years and you might come to a better understanding of this? You have questioned the existence of the “equity premium”. Insisted that high volatility is a sign to sell stocks. Occasionally pointed to charts that demonstrate how bonds have outperformed stocks over the past 10-20 years. If you hear something often enough, people will begin to believe it is true. Even when it isn’t.

We are seeing a bond bubble today that is every bit as powerful as the “tech bubble” (which actually inflamed all sectors of the market in 1999-2000) and the housing bubble. Is there a difference between paying 69x earnings for KO stock in 2000, paying 30x imputed rent for real estate, and paying 50x coupon on a ten-year bond? In each case the principal justification is that the investment has performed well over the LAST ten years.

So yes, there is some skepticism about earnings. There is some legitimate fear of volatility. There is an aging population that is seeking safe havens for their retirement. But the most powerful driver of a bubble are those charts that show you the last ten years of performance.

For what it’s worth, I don’t think stocks are a great buy at this time. The earnings yield isn’t that much above the pre-bubble norm, and growth will surely be slower going forward than it was in the 80s and 90s. But an 8% earnings yield would imply the potential for a 9-year doubling period, simply by using 100% of the earnings for stock buy-backs. Nine years from now we will either be looking at a 16% earnings yield on stocks, or they will be trading above where they are today.

Posted by TFF | Report as abusive

*MAYBE* treasury yields would have followed more closely to stock earnings yields, were it not for a major player in treasury investors (chart via FAS of CRS study):
http://goo.gl/Jh103

And so what I’m positing, is that a giant panda interested in keeping their currency competitive, would have created upward pressure to US treasuries, thus the divergence.

Posted by GRRR | Report as abusive

…upward price pressure / lowered yield pressure, that is… :D

And if you need a link to the study: http://goo.gl/olLQY

Posted by GRRR | Report as abusive

@TFF: If the 100% of the earnings are used for buybacks, isn’t the doubling period 12.5 years? Earnings don’t compound if they are fully paid out as buybacks or dividends, because they are not being reinvested by the company at the previous rate of growth. Moreover, assuming the company faces competition from other firms or new entrants, the earnings stream will probably erode over time. Without efficient/effective reinvestment of earnings, competitive forces eat away at margins.

Posted by maynardGkeynes | Report as abusive

“If the 100% of the earnings are used for buybacks, isn’t the doubling period 12.5 years?”

That would be the period to completely redeem all shares. Doubling would involve a buyback of 50% of the shares.

The exact path depends on whether you maintain share price or the P/E ratio as constant. If the share price is constant, then that 8% initial earnings stream would double to 16% after 6.25 years (the repurchase of 50% of the shares). If the P/E ratio is constant, then the stock price would double in roughly 9 years as given. Each year, the earnings would increase by 8% (and the share price along with it).

Posted by TFF | Report as abusive

Both equity and debt are means of raising capital. High earnings and low growth means no reason to raise more capital by either method. Very low rates means every possibility of buying back equity and paying off debt. Fewer equities and corporate bonds means nowhere to put cash except government bonds.

Posted by BigBadBank | Report as abusive

“Without efficient/effective reinvestment of earnings, competitive forces eat away at margins.”

Agreed. And “efficient” reinvestment probably isn’t all that efficient. Either way, the “real” earnings yield is probably closer to 6% than 8%.

Posted by TFF | Report as abusive

Total return tends to become significantly greater than E/P (earnings yield) when expected earnings growth becomes greater. Rather than showing that stocks are a good buy now, your chart could also be showing extreme pessimism about the future.

Posted by bmz | Report as abusive

The important parts of the chart to study are where the directions of the respective trends diverge from each other. The first was in 2002 (post dot-com boom); the second was in 2007/08 (sub-prime credit crunch). These divergences merely show the movement from stocks to bonds as an asset class in times of panic. In the intervening period the relative positions are unchanged, indicating that stocks take a long time to regain the trust of investors, or that investor strategies are changed by each crisis to include higher bond content.

Additionally, this is the period over which the US Trade Deficit got remarkably out of hand, and creditor nations increased their holdings of Treasuries. It could also reflect the demographic of the baby boomers nearing retirement and moving from stocks to bonds after a crisis, and then staying there as they follow classical investment theory of moving towards safety as they near retirement. What’s interesting here is the psychology behind this change: initiated not so much by the needs of investors, but only by a crisis. In other words, before a crisis greed rules; after each crisis, fear rules.

The chart is interesting in a historical fashion, but doesn’t show any predictive trend IMHO. Yes, it shows stocks are cheaper than they were, but until P/Es drop below 10 they aren’t as cheap as they were before electronic trading.

Posted by FifthDecade | Report as abusive

Comparing earnings yield on stocks with the interest rate on treasuries is comparing apples and oranges. You don’t buy treasuries because you think they might go up ten or twenty per cent, you buy them because you don’t want to risk your capital and you want a predictable income. If that’s your criteria, then you need to compare it with stocks with the same parameter, which is dividend yield, as Kid Dynamite suggested. And even then comparing the yields is not a meaningful exercise, since stock prices rise and fall a lot more than treasuries, distorting the true yield.

It might very well be a good time to buy stocks, but I don’t think most people (other than TFF) make that decision based on treasury yields. They buy and sell stocks based on how confident they are that they will go up or down, and there are a lot more factors at work than treasury yields. I know people like simple models, but are you oversimplifying to appeal to tea partiers now?

Posted by KenG_CA | Report as abusive

@KenG
When people buy stocks, they may not think they are comparing them to treasury yields, but intuitively they have to be, unless you believe that investing decisions are purely behavioral. There’s no other basis for making an investment decision other than risk vs reward, and the starting point for that analysis must be the yield on treasury bills. On an intuitive level, I think everyone knows this.

Posted by maynardGkeynes | Report as abusive

Maynard, you give people way too much credit. For a lot of individual “investors”, the decisions are purely behavioral. If it was all about comparing to treasury yields, intuitive or otherwise, you wouldn’t see the panic driven volatility we experienced in the past week or so. Yields didn’t change that much. What drives the market up and down are people’s expectations, and very few of them decide to sell or buy because they think treasury yields will go up or down.

Posted by KenG_CA | Report as abusive

Gillian Tett has an article that might help shed some light into this as well…

http://www.ft.com/intl/cms/s/0/d5733486- c42d-11e0-ad9a-00144feabdc0.html#ixzz1Uv oO7sHN

Posted by Sprizouse | Report as abusive

“For a lot of individual “investors”, the decisions are purely behavioral.”

Agreed. Unfortunately, this “strategy” has a proven record of very poor returns. Even index investing looks good in comparison.

“I don’t think most people (other than TFF) make that decision based on treasury yields.”

I’m not sure that low Treasury yields tell us anything about stocks, other than as a harbinger of very weak growth expectations in the coming decade. But they do tell me what I would earn if I were to invest in Treasuries. If I think I can do better than that elsewhere, then I need to try.

What might happen?
(1) Stocks might jump in value as investors realize they are (comparatively) undervalued. Not sure where the money would come from, but perhaps the Fed will oblige?

(2) Bonds might fall in value, as investors wake up to the fact that 2% interest on a ten-year bond is ridiculous.

(3) We might enter an inflationary period, with one wave after another of “quantitative easing”. Inflationary periods squeeze profit margins and cash flow, and are definitely not good for stocks, but they hammer bond values even worse.

(4) We might enter a strongly deflationary depression, in which GDP and stock earnings fall dramatically. Of course a deflationary depression of any significance would also cause a wave of bond defaults at the present debt levels.

In the first three scenarios, either owning stocks is better than owning bonds or owning bonds is much worse than owning stocks. The fourth scenario is more of an “Armageddon” scenario, in which weaker investments of all kinds would be wiped out. I’m pretty sure the Fed would open the floodgates to forestall that, however.

Note that multinational corporations (the bulk of the S&P500) are responsive to the state of the global economy, not just the domestic economy. They can survive the decline of the US as long as the emerging markets continue to grow.

Posted by TFF | Report as abusive

Ed Yardeni points out that stock Earnings Yields move inversely to the price of Gold. We’re back to the Carter days…

http://blog.yardeni.com/2011/08/valuatio n-gold.html

Posted by Sechel | Report as abusive

The “more profound” thing that’s going on is simply that the owners of capital have spent the past three decades hoovering up almost all the value produced by economic growth, with only a brief break in the ’90s when labor got a little of it. Add to that the huge shift in the tax code to benefit corporate profits, and this graph does not seem so surprising to me. We are, in effect, subsidizing corporate profits, at the expense of the consumer and gov’t sectors. (And since consumers are, by and large, the drivers of economic growth, this also means we’re putting a drag on long-term growth, and hence expectations about interest rates. So long-term rates stay low. Read Krugman.)

Posted by Auros | Report as abusive

A few thoughts on this:

1. The Greenspan-Bernanke-Trichet put is firmly in effect in trying to shove sovereign yields as low as they will go. While it may appear normal to us now, because it has been going on for nearly a decade, it is not normal in the long-term.

2. Very low sovereign yields generally imply stagnation or deflation. This is generally bad for stocks.

3. Several well-known stock valuation metrics that look at multi-year patterns (Shiller CAPE, Tobin Q etc.) all indicate significant over-valuation of stocks. The only thing that makes the current levels look remotely sane is that they are lower than the previous major peaks in 2000 and 2007 which did not end well for stocks. The recent valuations approach those of 1929 and 1960s peaks.

4. The S&P 500 of 2011 is NOT the S&P 500 of 1995. There is a lot of survivorship bias reflected. Treasuries (despite the recent Tea Party best efforts) have not had a significant perentage of them default (go bankrupt), shrink in value so that they are dropped from the index, or get merged into other companies. You buy Treasuries because they are highly unlikely to be Enron – this is why the debt ceiling crisis was so critical and potentially damaging.

Posted by ErnieD | Report as abusive

TFF, I simplified my answer. I didn’t mean to imply that was all you considered, just that if treasury yields were at 6%, you might not buy stocks, unless their yields were much higher. So the treasury yields might have an impact on the decisions of somebody (you) who chooses stocks over bonds for their total income+appreciation returns, but for many people, it’s not an issue, not even an unconscious one.

Posted by KenG_CA | Report as abusive

Ah, understand now KenG. And yes, I would dearly love to have a little diversification in my portfolio. I just don’t feel I can afford it given the present pricing spread.

Posted by TFF | Report as abusive

TFF:

The time to add diversification to a portfolio is when it is not apparent that it is needed.

I used the latter half of the 2008-2009 debacle to add emerging markets, commodities (futures ETFs and equity mutual funds), precious metals, and non-US inflation-protected bonds to my portfolio once it became clear that Bernanke et al were intent on pumping money into the financial sector.

On a stratight total return basis, I would have been better putting all of my money in US equities but most of my portfolio was barely aware that there was any changes in the markets over the past month, so I traded off some short-term return for significant reduction in volatility.

With a recent Shiller CAPE over 20, I haven’t felt that stocks were going to return anything close to their traditional numbers over the next decade so I haven’t felt like I have given anything up for the long term.

Posted by ErnieD | Report as abusive

“I traded off some short-term return for significant reduction in volatility.”

A sound philosophy, and one I attempt to achieve through an emphasis on “defensive” stocks. My domestic stock portfolio is down just 6.7% since July 21 (up 3.4% YTD) and has consistently overperformed in market corrections.

I’ve never looked at non-US bonds. Might not hurt to add a little currency diversification? Definitely agree on emphasizing exposure to emerging markets and commodities, though I do both of those through equities. Some interesting things to think about, ErnieD.

This is probably a bad time to be buying stocks, though I do expect they will return a small five-year profit. I simply think it is an even worse time to be investing in US bonds.

Posted by TFF | Report as abusive

what about china buying tons of treasuries and no equities?

Posted by q_is_too_short | Report as abusive

It’s not just China, but other countries plus quite a few folks who have Plenty More Than Enough and Merely Need to Keep It. And besides, if a self fulfilling depression results….. they get to create Dynasties. Portfolios are for the little people, the big people want something… BIGGER!

Posted by threeRivers | Report as abusive

TFF said: “Exactly. As of today, my retirement accounts (with a balance that is 30x ongoing contributions) are 100% invested in stocks, 0% in bonds. For better or for worse, I am putting my money on that assessment. All of it.”

I wonder if that is what my Grandfather said, when he invested as a wealthy man, just before the crash. My Grandmother had to sell the house (now today used as a medical centre and once as a girl’s school, as it is that large)and furniture so that they could come from overseas to join him. If not for the house, I doubt they would have survived as they didn’t have the skills or mindset.

It might be the stories of the depression (some actually very amusing because my grandmother, who was ‘upper-crust’ in England and never cooked or cleaned in her life, made memorable remarks about her new life) that have made me even more cautious this last time.

You would say I over reacted no doubt, but isn’t your placing all your eggs in one basket a rather unsafe move given market volatility and people like me making it even more volatile?

Posted by hsvkitty | Report as abusive

hsvkitty, if KO, JNJ, XOM, MMM, and PG all go bust, there won’t be much left standing. Certainly there is no hope of the dollar or Treasury obligations being worth anything after a crash of that magnitude.

And my backup plan is much like your grandfather’s — my mortgage is nearly paid off and we have flexible marketable skills.

“You would say I over reacted no doubt.”

That depends — what did you do with the money? If you are holding it all in dollar-denominated instruments such as money market accounts, CDs, paper currency, or Treasury obligations, I would say that you are taking HUGE risks with your savings. Much larger risks than I am, investing in top quality global companies whose survival is not dependent on any single country or currency.

Volatility is not the same thing as risk. “Risk” is the chance that you will be left holding something that is completely worthless. Enron stock. Second Reich marks. Anything beyond canned food and guns in the event of the complete breakdown of civilization. Volatility simply implies that the markets are having trouble figuring out the exact value to put on something. I can live with volatility, but risk is the end of the game.

Deflationary depressions are not the only kind. You sound well prepared for that scenario, not well prepared for the opposite.

Would it be any less risky if I were to convert all of our savings to gold? If my calculations are correct, it would make a pretty cube less than four inches on a side.

Posted by TFF | Report as abusive

Hope no one else minds if we have a conversation here. I bet neither of my grandpas would think a market wasn’t risky even in the long term. And risk to me was leaving my money in the market when it felt like it was about to nose dive.

Actually Grandpa didn’t have a plan at all and had few marketable skills. (Think about how few do ‘nowadays’) He ended up renting a house, lived upstairs in 2 rooms and then made the downstairs a store/pharmacy and snack counter. My Mom, their only child, quit school in grade 5 to work. That was the depression for that side of the family… rich turned very suddenly to barely getting by. (My Mom’s feet were forever distorted as they couldn’t afford shoes to grow with her)

My other grandfather was a farmer. He didn’t feel the depression much at all as he had bought a lot of farm land cheaply (a few dollars an acre back then) in the prairies and farmed it. He had 12 kids and had no memories of hardship as farming is hard work and constant, and supper was in the yard grazing or in the field.

The market is a gambler’s dream. All the crack you need if you want to be a day trader. I know you are invested for the long term, as was I, but I was “feeling” a lot more of the volatility (The more bull, the more BS is flying again I see) that worried me even more even though mine was diverse. To me that volatility took me to the brink of MY risk intelligence and it paid off. I have more money to invest/risk should I ever want to go there again and my move stopped the gnawing in my belly. (as well as further gnawing into my retirement funds)

Gold no. I always felt that it was too “shiny” a market. Yes,I have a good chunk of money in bonds and CDs, and I have tax free savings accounts for emergency funds, as well as far too much of my RSPs (non self directed) in the market and put a whole lot on the house so that if worse comes to worst and interest rates rise I can pay the little I owe off quickly. I also own some of that prized farmland in case of hyperinflation and, feek I am prepared for anything short of an Apocalypse. Either way, my belly stopped aching.

I bet there are still a lot of people with big mortgages borrowing to buy in the dip of the same market I vacated. I am pretty certain I am better off, but as always with the market only time will tell. With unemployment rising, your housing situation still reeling, a government in thrall of lobbyists and the military and the Tea Party vying for more control, I can’t see the USA recovering any time soon.

One more story to tell. In deference to my Mom, my Dad never invested one penny of his money in the market. Every penny was in long term bonds and bank CDs. He was a farmer, then a teacher and they were frugal and saved. Over the last 10 years my Dad gave nice tidy sums to each of the kids as a living will. He passed away recently and we were all sure the bulk had been allocated over the years, but what was still left in bonds was a shock to us all. We aren’t going to be filthy rich, but we are the beneficiaries of a huge windfall from a steady saver who never made more than half what I used to.

So in closing, I hope all of your investments do well and it sounds like you made sound ones and will, but should you find you no longer have the stomach to have all your eggs in one basket, don’t forget bonds don’t have to come wrapped in the flag.

Posted by hsvkitty | Report as abusive

One other thought… All else equal, which is riskier?

Situation 1: $300k stocks, $200k bonds, $200k mortgage (on a $300k house)
..or..
Situation 2: $300k stocks, $200k bonds, renting a $300k apartment
..or..
Situation 3: $300k stocks, no bonds, no mortgage (and a $300k house)

I bet there are plenty of people in situations (1) or (2) who believe they are investing conservatively, yet the third alternative is deemed insanely risky.

When bonds yield just 2%, selling them to pay off a mortgage is one of the best “investments” you can make. And if that leaves you with just stocks in your portfolio for a few years, is that truly so bad?

Posted by TFF | Report as abusive

Our posts crossed. :)

“I have a good chunk of money in bonds and CDs, and I have tax free savings accounts for emergency funds, as well as far too much of my RSPs (non self directed) in the market and put a whole lot on the house so that if worse comes to worst and interest rates rise I can pay the little I owe off quickly.”

That sounds appropriate. I would love to reduce my retirement accounts and pay off the mortgage entirely, but the contribution limits would prevent me from putting the money back in. The tax shelter is worth too much to give up easily. So we sold what we could from the ordinary investment accounts (leaving a few long-term positions with massive capital gains) and will finish paying off the mortgage from ongoing savings in a couple years.

“I bet there are still a lot of people with big mortgages borrowing to buy in the dip of the same market I vacated.”

::shudder:: You might be right, but borrowing at 4% to invest in *this* market is borderline insane. When I say that I expect positive five-year returns, I mean that quite literally. I wouldn’t be shocked if the market were to average 8% annual gains over the next five years, but neither would I be at all surprised to see 2%. It surely depends at least in part on how the Fed chooses to walk the tightrope between inflation and deflation.

“In deference to my Mom, my Dad never invested one penny of his money in the market. Every penny was in long term bonds and bank CDs.”

Over the last 40 years that has been a near-optimal strategy. Bonds do very nicely in periods of falling interest rates, and we’ve seen a steady slide from the late 70s to the present. If interest rates fall another 10%, then bonds will continue to match stocks over the next 40 years. But that, of course, would take them well into negative territory. (On an inflation-adjusted basis they are already there.)

“bonds don’t have to come wrapped in the flag”

Would need to do some homework before dipping my toes in those waters. And not sure where I would even begin to look — Europe’s problems are worse than our own, Japan has issues, and China doesn’t want its currency to deviate too fast from that of its customers.

With the strong natural resource base, Canadian dollars could be attractive?

Posted by TFF | Report as abusive

I basically agree. We were 100% in stocks at the bottom of the market in 2009 mostly for this reason, and our money more than doubled in just over a year. But we pulled out in March with the S&P at 1320 because, from my study and experience, prices little anticipate and watch political crises, especially with how much more serious they’ve become with the modern Republican Party.

And the market did underestimate and underanticipate the possibility of government shutdown and/or debt default. As important information on this came out weeks and months before, the market ignored it. I see the same risk again with the September 31st budget deadline. There could be a long government shutdown, plunging stock prices, that I suspect is again not being fully considered in current prices. So we’ll stay out until at least after that.

Then, I’ll watch the election closely (which I do anyway, as politics is a longtime hobby). There’s very strong evidence that the markets grossly underestimate how good a Democratic President is for the economy and how bad a Republican is (see http://richardhserlin.blogspot.com/2008/ 08/its-not-just-economy-in-general-thats .html). If Obama is looking strong, or wins, I’ll be eager to jump back in.

One thought I have on the spread between stock earnings yields and bond yields is that perhaps as income inequality has skyrocketed, you have a lot more wealth controlled by very rich people, and they may be a lot more risk averse with their capital, as they primarily live off of it. But there may be a lot of important factors to this. If you look at historical P-E ratios going back 100 years you see some really low levels, what really look like reverse bubbles.

Posted by RichardHSerlin | Report as abusive

This proves we have a liquidity trap in a bear market.

Posted by Boleslaw | Report as abusive

What’s your expectation for the following:

1) US inflation
2) global inflation ex-US
3) US growth
4) global growth, ex-US

The disconnect between SPX and CMT10 becomes fairly easy to explain: the US never recovered from the 2001 recession, but the world grew, and many of the SPX stocks are effectively plays on that growth (KO, XOM, etc.)

If 1 is essentially equal to 2, but 3

Posted by klhoughton | Report as abusive

hmmm…. wonder if the Greater Than sign did something strange…time to use GT instead.

3.GT.4 (or, more generally [1 + 3].LT.[2 +4]), then you would expect exactly what happened–stocks (global performance) outperformed UST (domestic only).

The bet now would have to be that global growth would continue to outperform the US going forward. It’s not a bad bet–though it is a weighted one, and between Euro issues,Japan’s current recession, and China’s attempt at dampening inflation, it’s not so clear as it was–but it’s not so clear as a glance at that chart would suggest.

Posted by klhoughton | Report as abusive

Excuse me for being rude, but who cares. The relationship is irrational as the risks (deliberate plural usage here to denote varied interpretations of the work risk) basis of each is radically different. Maybe try to get closer by comparing the earnings yield to BBB (or take your pick) rated corporate bond yields. Has anybody ever heard of any investor questioning whether Apple or Fedex or BHP is better value than a 10 year t-bond based on the earnings yield?
Maybe the chart is telling you that!

Posted by MarkieMills | Report as abusive

Lang Ping said yesterday: “I feel very proud, and have the determination and confidence to do)Shenyang Zhongze football team set sail marshal Li Jinyu as coach the reporter learned yesterday, Liaoning Zhongze group recently completed the acquisition of Shenyang Shenbei Football Club 100% equity