Leading indicators of an economic contraction, page-315

Jul03-Sep07 - your graph says expensive dont buy equities (ASX200 went from 3000ish to 6500ish. Oppsie what happened there Adam?)

2009 - your graph says expensive dont buy equities (umm hold on. Was that the start of the expansion phase of the longest credit cycle in US history? Hasnt the ASX gone up a lot since then? Oppsie )


You're clearly misinterpreting the graph.

2003 and 2009 represent the two highest points above the dotted black equilibrium line, reflecting extreme "cheapness" , with the attendant excellent market returns that followed those points in time. Ditto for 2012 (the other peak in the chart which you omitted to mention) when the spread reached almost at 500bp and after which the market appreciated by around 25% over the next 18 months, to the point where the spread returned to its long-term average, or "fair value".

Conversely, the spread was most compressed in 20o7 meaning that equity valuations were least attractive relative to bonds. The events of the following 12-18 months proved that to be the case. And in early 2011 equities again looked relatively expensive, an indication that was borne out by the market falling by some 15% over the next 18 months.


"So can you confirm you are suggesting the ASX200 is super cheap right now and we should be piling in? Its super cheap and going up 20%-45% yeah? So the ASX200 will surge to 7884-9526? Happy days, you rippa."

If interest rates remain where they are for the next year or two, then, yes, I think that equities are relatively very attractive.

Put it this way, if interest rates do remain low for the foreseeable future, then it would not surprise me in the least to see the Earnings Yield for the equity market continuing its downward trend, with the attendant increase in the value of the Index (assuming corporate earnings do not fall out of bed, and I'm not sure why that would happen given all the fiscal levers by the federal and state governments being set to near full tilt.)

Where do you feel my thinking is flawed?