3 ms·

> what matters for P/E ratios is the risk free rate Where's the research showing the empirical relationship between P/E ratios and the risk free rate? Also, w

> what matters for P/E ratios is the risk free rate Where's the research showing the empirical relationship between P/E ratios and the risk free rate? Also, we are living in a a time of unprecedented monetary aggregate growth (for the US at least). I posit his why the yield curve has been inverted for so long and yet there is no recession in sight. The predictive power of asset prices seemingly no longer exists.

pclmulqdq 3y ago
There's a ton of it: here's one person's regression. You can find the same in academic papers (although economics papers don't exactly deserve that label). https://www.currentmarketvaluation.com/posts/sp500pe-vs-interest-rates.php https://www.currentmarketvaluation.com/posts/sp500pe-vs-inte... It's also just common sense if you understand company valuation.
- jgalt212 3y ago
  It's not 1:1, and only fits over long periods of time. Furthermore, none of those studies encompass the great money printing period of COVID, and post COVID. And most of those studies model the 10Y rate vs stocks. The 10Y rate is not the risk free rate. In 2000 the SP500 PE was 40, and fed funds was 6%. it's low 20s now, and fed funds is 5.25% studies over more recent times have shown this correlation break down. It's probably the reason Ray Dalio retired.
  - FredPret 3y ago
    If a 10 yr T bill isn’t risk free, what is? A shorter term US Gov bond? I mean realistically the US will just print the money it needs to pay that interest. It’s not a consequence-free decision for them, but much better than defaulting.
    - jgalt212 3y ago
      10Y has duration risk. 1 week T bill have no credit risk or duration risk, hence this is the risk free rate.
      - pclmulqdq 3y ago
        That's not true at all. The "risk free rate" is a theoretical concept that represents the rate of return that you can get on capital without taking any risk. No bond alone is the risk free rate. Neither is the reverse repo rate or the rate of a money market. All of these are proxies.

pclmulqdq 3y ago

There's a ton of it: here's one person's regression. You can find the same in academic papers (although economics papers don't exactly deserve that label). https://www.currentmarketvaluation.com/posts/sp500pe-vs-interest-rates.php https://www.currentmarketvaluation.com/posts/sp500pe-vs-inte... It's also just common sense if you understand company valuation.

jgalt212 3y ago
It's not 1:1, and only fits over long periods of time. Furthermore, none of those studies encompass the great money printing period of COVID, and post COVID. And most of those studies model the 10Y rate vs stocks. The 10Y rate is not the risk free rate. In 2000 the SP500 PE was 40, and fed funds was 6%. it's low 20s now, and fed funds is 5.25% studies over more recent times have shown this correlation break down. It's probably the reason Ray Dalio retired.
- FredPret 3y ago
  If a 10 yr T bill isn’t risk free, what is? A shorter term US Gov bond? I mean realistically the US will just print the money it needs to pay that interest. It’s not a consequence-free decision for them, but much better than defaulting.
  - jgalt212 3y ago
    10Y has duration risk. 1 week T bill have no credit risk or duration risk, hence this is the risk free rate.
    - pclmulqdq 3y ago
      That's not true at all. The "risk free rate" is a theoretical concept that represents the rate of return that you can get on capital without taking any risk. No bond alone is the risk free rate. Neither is the reverse repo rate or the rate of a money market. All of these are proxies.