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« Investing for 2007: A Review of Valuation Issues | Main | December Jobs Forecast »

December 26, 2006


Scott Teresi

Thanks, Jeff! I was inspired to ask, by all the talk about the recent S&P Outlook article noting that the yield curve is inverted in the U.S. but not inverted if you use their measurement of global interest rates (GDP-weighted). Is there also an estimate of global earnings? If exact data for these global measurements isn't available, it seems like rough estimates are. Yahoo reports a P/E even for the Vanguard Emerging Markets fund:

I'm looking forward to reading your ideas for whether the Fed Model should be changed, and how. It's great that you're sharing your years of insight with us!


Good question, Scott.

The next installment of the series analyzes some limitations on the Fed Model, including the potential to invest in other assets.

For now, it seems clear that ETF's have made it easy to invest in world markets. Logic suggests that these asset classes (both foreign stocks and bonds) should be included. There may not be data to do so. More later --

and thanks again for the question. It is always important to think about omitted variables.


Scott Teresi

What might a Fed Model say if it were to incorporate global interest rates and an approximation of global earnings yield, rather than being so U.S.-centric? Would this still show stocks as undervalued?



I am familiar with the Gannon article. I promised to deal more extensively with some criticisms to approaches like the Fed model. I will suggest that the model may need another variable. The Gannon analysis leaves out a consideration of interest rates. I find that problematic.

Thanks for your comment.


Looks like the link above got truncated:


Nice post and some perhaps naive questions:
If you look at the earnings yield in 1979, it wasn't actually different from the bottom around 1940

So, why shouldn't the current period be the top of the range? Also, regardless of financial innovations shouldn't the market cap be constrained by the GNP over very long time-frames?


Thanks, Bill. Good observations. What would Einstein have thought??

Bill a.k.a. NO DooDahs

Other good dividing lines (besides the derivatives you mentioned) might be

(1) 1975 – "floating" U.S. dollar, as monetary policy influences the markets.
(2) The original Bretton Woods agreement.
(3) Changes in bank investment policy after the Crash.

Definitely the markets have a different character in different eras. After my work on money policy and stock market post 1980, I personally don't think a realistic model can GO past the 1975 barrier, and I think there was some adjustment after the currency started "floating."

I put "float" in quotes because all fiat currencies fall, but from the perspective of a skydiver, it appears other skydivers are floating ...

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