Meta tags:

Headings (most frequently used words):

2016, the, antonio, fatas, on, 29, tuesday, august, wednesday, blog, you, can, global, economy, friday, january, 2018, thursday, december, november, monday, october, 17, june, subscribe, via, email, archive, moving, location, make, risk, premium, small, again, oecd, procyclical, revision, of, fiscal, policy, multipliers, stock, market, looks, cheap, lower, interest, rates, but, raise, inflation, experts, facts, and, media, speculating, china, growth,

Text of the page (most frequently used words):
the (366), that (137), and (109), are (76), growth (65), rates (59), this (54), interest (50), stock (39), risk (39), for (37), not (37), with (32), rate (31), #market (29), but (28), very (28), low (27), gdp (26), they (25), share (23), what (23), ratio (22), #policy (21), has (21), level (21), real (21), earnings (21), high (21), will (20), from (20), can (20), more (19), look (18), years (18), about (17), per (16), current (16), premium (16), china (15), have (15), relative (15), bubble (15), 2016 (14), how (14), than (14), today (14), one (14), like (14), fiscal (14), prices (14), let (13), because (13), capita (13), lower (13), when (13), economic (12), countries (12), south (12), korea (12), during (12), you (12), even (12), investors (12), antonio (11), see (11), also (11), might (11), above (11), potential (11), debt (11), inflation (11), expectations (11), some (11), october (10), november (10), both (10), other (10), grow (10), all (10), either (10), index (10), august (9), posted (9), expect (9), its (9), far (9), given (9), looks (9), there (9), could (9), policies (9), their (9), times (9), long (9), nominal (9), levels (9), were (9), february (8), march (8), june (8), december (8), email (8), been (8), these (8), likely (8), below (8), was (8), increase (8), using (8), still (8), need (8), experts (8), view (8), wrong (8), make (8), previous (8), term (8), year (8), expensive (8), price (8), may (7), january (7), blog (7), pinterest (7), facebook (7), blogthis (7), does (7), historical (7), use (7), those (7), country (7), point (7), next (7), around (7), over (7), our (7), would (7), fatás (7), present (7), facts (7), two (7), monetary (7), know (7), central (7), higher (7), new (7), crisis (7), ratios (7), estimates (7), oecd (7), towards (6), last (6), good (6), much (6), 90s (6), time (6), terms (6), too (6), economy (6), world (6), post (6), which (6), article (6), any (6), global (6), most (6), banks (6), right (6), since (6), cheap (6), multipliers (6), election (6), april (5), september (5), business (5), seen (5), coming (5), end (5), similar (5), economies (5), convergence (5), decades (5), then (5), period (5), decade (5), down (5), fast (5), number (5), government (5), clearly (5), such (5), cannot (5), media (5), debate (5), financial (5), course (5), many (5), only (5), bank (5), recent (5), extremely (5), mean (5), macroeconomic (5), particular (5), change (5), expression (5), adjusted (5), where (5), markets (5), july (4), 2018 (4), fatas (4), posts (4), natural (4), chinese (4), based (4), faster (4), reach (4), same (4), start (4), example (4), 2000 (4), 2000s (4), starts (4), acceleration (4), reached (4), line (4), had (4), looked (4), benchmark (4), future (4), looking (4), should (4), different (4), best (4), few (4), among (4), well (4), influence (4), debates (4), citizens (4), just (4), 300 (4), analysis (4), through (4), something (4), close (4), japan (4), again (4), pay (4), into (4), assets (4), fact (4), success (4), believe (4), surprise (4), 2008 (4), going (4), back (4), equation (4), discount (4), 80s (4), expansion (4), remains (4), forecasts (4), free (4), while (4), trump (4), gone (4), cbo (4), 2014 (3), moving (3), subscribe (3), economics (3), public (3), deceleration (3), sustainable (3), sign (3), model (3), compared (3), robert (3), theory (3), ignore (3), second (3), plot (3), each (3), three (3), larger (3), picture (3), 1980 (3), allows (3), decelerating (3), goes (3), further (3), logic (3), say (3), case (3), growing (3), development (3), working (3), optimistic (3), without (3), really (3), written (3), interesting (3), his (3), simply (3), lot (3), issues (3), needed (3), informed (3), ever (3), advanced (3), being (3), large (3), who (3), maybe (3), here (3), under (3), read (3), flawed (3), views (3), outcome (3), willing (3), zero (3), value (3), borrowers (3), find (3), cent (3), combined (3), made (3), yield (3), curve (3), several (3), negative (3), communications (3), repeat (3), must (3), out (3), get (3), come (3), strong (3), correct (3), simple (3), constructed (3), stocks (3), before (3), depends (3), expected (3), words (3), chart (3), tells (3), perceptions (3), risks (3), uncertainty (3), assess (3), pricing (3), shiller (3), says (3), bubbly (3), express (3), administration (3), seem (3), unemployment (3), valuations (3), 2011 (2), 2015 (2), location (2), professor (2), european (2), school (2), singapore (2), center (2), research (2), transition (2), episodes (2), income (2), main (2), frontier (2), slowdown (2), states (2), beginning (2), compare (2), shows (2), continues (2), yet (2), put (2), less (2), comparison (2), true (2), slightly (2), path (2), note (2), performer (2), plenty (2), unclear (2), relevant (2), small (2), summary (2), happen (2), wednesday (2), democracy (2), result (2), lack (2), guess (2), political (2), tend (2), scientific (2), obvious (2), pisani (2), ferry (2), combination (2), education (2), tools (2), between (2), scenario (2), difference (2), discussion (2), published (2), quantitative (2), easing (2), presented (2), expansionary (2), lead (2), anyone (2), validation (2), pessimistic (2), calculation (2), constant (2), your (2), payments (2), associated (2), internal (2), exception (2), once (2), account (2), lenders (2), average (2), means (2), england (2), ecb (2), soon (2), territory (2), message (2), purchases (2), across (2), actions (2), forces (2), argument (2), short (2), measure (2), massive (2), always (2), understood (2), reasonable (2), earlier (2), raise (2), tuesday (2), gains (2), another (2), correction (2), record (2), trends (2), adjustment (2), although (2), side (2), stands (2), variables (2), changes (2), net (2), discounted (2), assumption (2), denote (2), write (2), unusually (2), recession (2), remain (2), justify (2), assessment (2), productivity (2), cycle (2), survey (2), professional (2), forecasters (2), mostly (2), philadelphia (2), fed (2), way (2), function (2), factors (2), them (2), feel (2), accept (2), ones (2), depend (2), volatile (2), capturing (2), optimism (2), pessimism (2), regarding (2), conditions (2), nothing (2), formula (2), irrational (2), combine (2), together (2), rewriting (2), construct (2), sum (2), easier (2), invert (2), plans (2), open (2), ready (2), puzzled (2), upgrading (2), tax (2), cuts (2), consolidation (2), middle (2), procyclical (2), revision (2), quite (2), after (2), issue (2), implicit (2), significant (2), assuming (2), actual (2), friendly (2), events (2), returns (2), address (2), skip (2), 2009, 2010, 2012, 2013, archive, via, web, site, portuguese, council, chaired, studies, insead, campuses, fontainebleau, france, senior, scholar, mcdonough, georgetown, university, usa, fellow, london, atom, home, older, frame, questions, traditional, economists, emerging, work, solow, prediction, lagging, opportunities, investment, technology, happens, naturally, converge, focus, predictions, nicely, validates, followed, treat, click, leading, annual, 1990, slowing, consistently, converges, accelerate, explanation, bring, spectacular, perspective, vertical, red, already, makes, clear, miracle, used, decelerate, passes, target, talking, age, population, currently, figures, final, question, range, yes, failures, providing, outliers, relationship, examples, hong, kong, city, ireland, unique, oil, producing, norway, dynamics, replicated, resources, seems, evolution, follows, conditional, show, keep, institutions, class, speculating, trusted, addresses, criticisms, received, brexit, vote, quoting, said, brings, illustrated, climate, science, gmos, mistrust, visible, enhance, trust, according, discipline, community, system, equips, distinguish, fiction, better, venues, dialogue, luck, unfortunately, ideal, little, complexity, debated, allow, ideology, opinions, expressed, somehow, able, serve, filter, controversy, sells, balanced, self, day, illustrates, articles, yesterday, merits, argued, generate, recovery, notice, dubious, taken, realize, badly, pick, figure, argues, counts, having, factual, shape, social, outcomes, economist, continue, sharing, wide, audience, depressing, rely, often, manage, respected, role, popular, enough, influencing, rest, contains, mistakes, embarrassing, publish, quality, ensure, stays, additional, borrowing, saving, taught, principle, authors, confusing, required, external, anywhere, governments, japanese, taxpayers, mortgage, buy, house, rent, anymore, alone, liabilities, taking, paid, transfer, matched, needs, cover, unhappy, ending, dosage, representative, universal, suffrage, reason, ideally, deliberations, votes, rational, decisions, state, knowledge, deliver, advance, wellbeing, jean, week, lowered, moves, reduced, probability, federal, reserve, reminder, normalization, positive, wait, months, messages, cut, aggressive, decreased, flat, switzerland, horizons, falling, typically, successful, push, fundamentally, comes, unable, counteract, getting, misleading, maturities, objective, steeper, flatter, why, failing, reasons, want, send, powerful, ammunition, stuck, action, addition, purchase, phenomenon, participants, circumstances, unusual, standards, difficulty, communicating, complex, strategy, sending, consistent, deflation, seriously, off, built, require, fear, biggest, simplistic, therefore, driven, increases, instead, ague, recently, informative, signal, 1981, late, adjust, basic, finance, links, fundamentals, story, unadjusted, justified, turned, sent, lowest, happened, double, early, recovered, aberration, demanding, averse, opposite, typical, undervalued, whether, think, indicator, scenarios, now, trying, revised, downwards, unfavorable, demographics, possible, carefully, differences, revisions, unlike, warning, signals, paints, tell, phases, converted, match, duration, forecast, available, decided, series, almost, identical, perception, calculated, monday, projections, suggest, projects, glad, idea, choice, environment, happy, admit, previously, thought, disastrous, advice, closer, full, employment, history, switched, contractionary, remained, seemed, necessary, effects, demand, assumed, cost, did, wages, slowly, returning, normal, vales, turns, decides, announced, measures, consists, wealthier, households, propensity, consume, call, encourage, consolidations, optimal, including, reported, study, leave, longer, absence, serious, presidency, organization, obsessed, excessive, asset, appreciation, outlook, conclude, data, mid, 1980s, follow, methodology, averages, achieved, 1929, measuring, updated, increased, downgrading, took, following, estimated, calculate, 1990s, fairly, overestimated, underpriced, coupe, climbed, fell, kept, stable, feeling, president, source, boost, implemented, adopted, skeptical, companies, labor, becomes, tighter, effect, takes, contrary, regardless, stated, provided, details, contradicted, himself, numerous, statements, door, damaging, mention, catastrophic, puzzling, dangerous, features, associate, potentially, extrapolate, everything, else, underpricing, cautions, 2007, peak, craziness, room, remember, preceded, fall, results, compensation, thursday, subscribing, subscription, link, http, antoniofatas, blogspot, com, friday, sidebar,

Text of the page (random words):
gone up as well how do stock market valuations look like today i follow the same methodology of the previous post and start with the price earnings ratio constructed by robert shiller we know that this p e ratio has been high relative to historical averages today it stands above 28 a level only achieved before in the 2000 bubble or in 1929 but the p e ratio depends on several macroeconomic variables in particular the level of real interest rates in my previous post i made the argument that once we correct for the level of the real interest rate the current p e ratio looks reasonable in particular if we express the price of stocks as the net present real discounted value of earnings under the assumption that current earnings are expected to grow in real terms at a rate g and using r to denote the risk adjusted discount rate we can write p e r g in other words the price to earnings ratio can be written as p e 1 r g to make the expression easier to read let s invert it e p r g and let s express the risk adjusted discount rate as the sum of a risk free rate rf and a risk premium rp e p rf rp g this expression says that the e p ratio is a function of three factors each of them can make the ratio low i e stock prices high relative to earnings either real interest rates are low or investors expect earnings to grow fast or they feel good about risk and they are willing to accept a low risk premium the last two terms are the ones that depend on expectations can be more volatile and are capturing the optimism or pessimism of investors regarding macroeconomic conditions both potential growth and perceptions of risk while there is nothing in this formula that allows us to assess how irrational investors are one would expect that at times where stock prices are seen as bubbly are when either estimates of growth are too high or the risk premium is too low let s combine the two together by rewriting the equation above to construct a potential bubble index of the stock market bubble index g rp rf e p measuring the real risk free rate using 10 year interest rates and inflation expectations from forecasts of inflation from the survey of professional forecasters posted at the philadelphia fed we can get the updated picture below we can see that after the election the index has increased both because of higher stock prices and also higher interest rate the stock market is more bubbly than back in october but still in line with historical estimates one issue that might be relevant for this chart is that we have been downgrading expectations of potential growth over all these years how much would our assessment change if we took this into account using cbo potential growth estimates for the following 10 years as a measure of estimated real earnings growth we can calculate the implicit risk premium as rp e p rf g this number tells us the implicit compensation that markets expect for risk given current e p ratios real interest rates and assuming markets share the views of the cbo about future growth rates and that earnings grow at similar rates as gdp below are the results of such calculation what we can see in this chart is that today the risk premium remains in line with historical estimates although it has come down after the election as expected the risk premium reached a very low level at the end of the 1990s when we combined extremely high p e ratios above 40 with fairly high real interest rates this is strong sign of a bubble because either markets overestimated growth relative to cbo forecasts or underpriced risk the risk premium was extremely high during the 2008 09 crisis when p e ratios were extremely low and interest rates had come down very fast but those were times of very high uncertainty in the last coupe of years the risk premium has been around 6 while stock prices climbed interest rate fell and kept the risk premium stable since the election the risk premium has gone down by 1 and it is about 5 that is not a low number but the change is significant clearly markets are either a upgrading their expectations of growth relative to cbo estimates b or assuming the policies of the new administration will make earnings grow faster relative to gdp c or feeling that uncertainty has gone down with the election of trump as the next president how much growth will increase remains a source of debate while some believe that potential expansionary fiscal policy might boost growth it is still unclear how much of it will be implemented and the actual policies that will be adopted might not be as growth friendly as markets believe given what we know so far i remain skeptical about the potential for acceleration of growth rates in the coming years earnings could grow faster than gdp growth with policies that are friendly to companies but as the labor market becomes tighter it is not obvious how large this effect can be and this takes us to the last issue risk clearly investors are not pricing much risk in the stock market quite the contrary this is a surprise regardless of what you believe about trump s stated policies he has provided very few details on what his actual policies will look like he has contradicted himself in numerous times and some of his statements open the door for very damaging events from a political and economic point of view that could lead to a global economic slowdown or a recession not to mention other more catastrophic events the market is clearly not pricing any of this risk i find this puzzling is this a bubble we will find out soon but it starts looking like the beginning of one where two very dangerous features are present a investors associate high p e ratios with potentially higher stock market returns because they extrapolate recent trends this is wrong high valuations mean lower future returns if everything else remains constant b investors seem to be underpricing risk at time where some cautions might be needed we are still 1 point from the risk premium at the 2007 peak and very far from the 2000 craziness so there might still be some room to go but let s remember that those are the years that preceded a significant fall in the stock market not the right benchmark to use antonio fatás posted at 12 29 2016 10 58 00 am email this blogthis share to x share to facebook share to pinterest tuesday november 29 2016 the oecd procyclical revision of fiscal policy multipliers the oecd just published its november 2016 global economic outlook their projections suggest an acceleration of global growth rates in particular in countries with plans for a fiscal expansion in the case of the us and based on the plans of the trump administration the oecd projects an acceleration of gdp growth to 3 in 2018 i am very glad to see that the oecd is more open to the idea that a fiscal expansion might be the right policy choice in a low growth environment i am also very happy that they are ready to admit that fiscal policy multipliers are larger than what they previously thought but i am puzzled that they seem to ignore their previous disastrous economic policy advice and i am even more puzzled that they are upgrading their estimates of fiscal policy multipliers in particular for tax cuts at the wrong time in the business cycle when the economy must be closer to full employment here is the history back in 2011 many advanced economies switched to contractionary fiscal policy at a time where their growth rates were low and unemployment rates remained very high during those years the oecd seemed be ok with fiscal consolidation given the high government debt levels consolidation was necessary they understood that there were some negative effects on demand but as they assumed multipliers or about 0 5 in the middle of a crisis with very high unemployment rates the cost did not seem that high today in an economy with unemployment rate below 5 and wages and inflation slowly returning to normal vales and a central bank ready to raise interest rate the oecd turns around and decides to change the fiscal policy multipliers to something close to 1 even if the announced fiscal measures consists mostly of tax cuts to the wealthier households with low propensity to consume this is what i would call a procyclical revision of fiscal policy multipliers encourage consolidations in the middle of a crisis and expansion in good times not quite what optimal fiscal policy should look like and of course the media including the financial times reported on the oecd study as a validation of the new us administration policies and i leave for another longer post the absence of any serious discussion of the risks associated to a trump presidency this is coming from an organization that has been obsessed with the risks of inflation and excessive asset appreciation during the crisis antonio fatás posted at 11 29 2016 01 28 00 am email this blogthis share to x share to facebook share to pinterest monday october 17 2016 the stock market looks cheap how expensive is the us stock market have the strong gains since the financial crisis of 2008 built yet another massive bubble that will require a correction some investors fear that recent stock market record levels are a sign that this is the biggest bubble ever of course such a simplistic comparison of stock prices is flawed both because stock prices are nominal and therefore likely to go up over time and also because they are driven by real earnings which are also likely to increase as real gdp increases to correct for these trends we can do a simple adjustment and look instead at the price to earnings ratio i will use here the one constructed by robert shiller although some ague that recently the index could be less informative because of the way earnings are being calculated the p e ratio shows that the end of the 90s bubble was by far the period were stocks looked the most expensive relative to earnings what do p e ratios look like today on the expensive side with a ratio above 26 it stands right at the level before the 2008 crisis and a lot higher than previous similar historical episodes most tend to compare it to 16 as the average p e ratio in recent decades to signal that the stock market is very expensive without going back many decades we could say that the stock market today looks as expensive as it has been since 1981 with the exception of the bubble of the late 90s but that cannot be the end of the analysis as we know that the p e ratio depends on several macroeconomic variables in particular the level of real interest rates and we know that real interest rates are at very low levels today and likely to say low for a long period of time how does the above analysis change if we adjust for changes in the interest rate let s go back to the basic finance equation that links the p e ratio to macroeconomic fundamentals start with a simple expression of the price of stocks as the net present real discounted value of earnings under the assumption that current earnings are expected to grow in real terms at a rate g and using r to denote the risk adjusted discount rate we can write p e r g in other words the price to earnings ratio can be written as p e 1 r g to make the expression easier to read let s invert it e p r g and let s express the risk adjusted discount rate as the sum of a risk free rate rf and a risk premium rp e p rf rp g this expression says that the e p ratio is a function of three factors each of them can make the ratio low i e stock prices high relative to earnings either real interest rates are low or investors expect earnings to grow fast or they feel good about risk and they are willing to accept a low risk premium the last two terms are the ones that depend on expectations can be more volatile and are capturing the optimism or pessimism of investors regarding macroeconomic conditions both potential growth and perceptions of risk while there is nothing in this formula that allows us to assess how irrational investors are one would expect that at times where stock prices are seen as bubbly are when either estimates of growth are too high or the risk premium is too low let s combine the two together by rewriting the equation above to construct a potential bubble index of the stock market bubble index g rp rf e p what this equation says is that the stock market is going to look expensive when the risk free rate looks high relative to the earnings to price ratio given that the only way to justify such high stock prices is through expectations of high growth or perception of unusually low risk what does this index look like i constructed the difference between rf e p by using price to earnings ratio and 10 year nominal interest rate from shiller and i converted nominal into real interest rates using forecasts of inflation from the survey of professional forecasters posted at the philadelphia fed i mostly use 10 year inflation forecasts that match the duration of the nominal interest rate but for the earlier years only the 1 year inflation forecast is available to i have decided to plot both series which looks almost identical this is what the stock market bubble index looks like this chart tells a very different story from the unadjusted p e ratio the 90s bubble is still there as you would expect because interest rates were high this means that the very high stock prices during those years could only be justified by very optimistic views on growth or perceptions of unusually low risk both were present and they turned out to be wrong that s what a bubble looks like we can also see that the financial crisis of 2008 sent stock prices close to the lowest levels similar to what happened during the double recession of the early 80s since then stock prices have recovered but they remain low relative to any of the previous years even if we ignore the 90s as an aberration compared to the expansion of the 80s or the 2000s the stock market today remains cheap and by cheap we mean that to justify current prices we do not need a very optimistic view on growth or that investors are demanding a very high risk premium in other words the stock market tells us that either investors are pessimistic about growth or very risk averse which is the opposite of what you expect to see during a typical bubble does this mean that the stock market is undervalued no it all depends on whether our current growth expectations or risk assessment are correct growth might surprise us and be even lower than what we think today risk could be a lot higher maybe 10 year interest rates are a really low indicator of what interest rates are going to look like in the next 10 years in all these scenarios the stock market will look more expensive than what it looks today but growth could also surprise us through gains in productivity and it might be that some of the current risks do not look that likely a few years from now and then the stock market will look really cheap that s the uncertainty that we always have when trying to assess the p...