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The cost of equity financing (roughly speaking, earnings yields) soared.
Today they talk of the "Fed model", which divides earnings yields by Treasury-bond yields.
The model compares the medium-term government bond yield with the prospective earnings yields (the inverse of the price-earnings ratio) on the stockmarket.
Mr. Gannon said he was looking at stocks with earnings yields of 7.5 to 8 percent, which compare favorably with 4 percent on United States Treasuries and 4.65 percent on municipal bonds.
Bond yields and earnings yields did indeed seem to move in tandem for about 15 years, and then the relationship broke down completely at around the turn of the century (see top chart).The Fed model was a classic case of selective use of data.
Proponents of this view point to the spread between the borrowing costs of sovereign governments and firms, as well as the unusual level of earnings yields on shares relative to yields on bonds.I have a different view: the entities capable of issuing safe assets (governments with their own currencies) have been failing to do so in sufficient size to meet investor demand.
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Firstly, investors don't earn the earnings yield as they do with dividends.
They say that with the current earnings yield being 6.4% and the Ten year note yielding around 3% that stocks are a great value.
When the earnings yield is lower than the Treasury yield, the model considers stocks overvalued.
The earnings yield is the inverse of the price-to-earnings ratio.
One is the "earnings yield ratio", which compares returns on government bonds with an implicit earnings "yield" (in fact, the inverse of the p/e ratio) to shareholders.
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Justyna Jupowicz-Kozak
CEO of Professional Science Editing for Scientists @ prosciediting.com