tag:blogger.com,1999:blog-1110014885778996459.post3844388458093587734..comments2024-03-29T04:50:03.060-07:00Comments on Idiosyncratic Whisk: Follow up on Earnings YieldKevin Erdmannhttp://www.blogger.com/profile/07431566729667544886noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-1110014885778996459.post-42862109753253650872014-10-22T23:06:47.329-07:002014-10-22T23:06:47.329-07:00Sorry, my writing was unclear. I agree with you. ...Sorry, my writing was unclear. I agree with you. I was just trying to say that the rise in equity values would come about from improved economic activity from the more optimal policy, and not simply as a first order effect of the change in rates themselves.<br /><br />You're right. Sentiment would improve, and demand shock risks would decline, and this could reduce equity risk premiums, which would probably also increase growth rates, etc. I'll update the post.Kevin Erdmannhttps://www.blogger.com/profile/07431566729667544886noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-25103837885059373772014-10-22T21:57:23.205-07:002014-10-22T21:57:23.205-07:00TravisV here.
Great stuff, thanks for the follow-...TravisV here.<br /><br />Great stuff, thanks for the follow-up!<br /><br />At the moment, I can't quite accept "The earnings yield would probably rise slightly along with some corporate releveraging, and that increase in required returns would keep equity prices from increasing."<br /><br />It seems to me that investors who experience ten years of constant 1% inflation would naturally be more risk-averse than investors who experience ten years of constant 3% inflation. The odds of getting stuck in the zero lower bound are far higher at 1% inflation than they are at 3% inflation.<br /><br />So it seems to me that for that reason alone, faster NGDP and 3% inflation should result in lower equity risk premiums (and thus higher P/E ratios).Anonymousnoreply@blogger.com