Magic word on CNBC "the FED model" – third biggest bulls… in history

The FED model is the nicer expression for screw the people model introduced by Alan Greenspan. Here’s the theory:

The “Fed model” is a theory of equity valuation used by some security analysts that hypothesizes a relationship between long-term treasury notes and the expected return on equities.

According to this valuation model, in equilibrium the real yield on the 10-year U.S. Treasury Bonds should be similar to the S&P 500 earnings yield (that is, S&P forward earnings divided by the S&P level).[citation needed] Differences in these yields identify an over-priced or under-priced equity market.

More specifically, if the S&P earnings yield is higher than the treasury yield investors should sell treasuries and buy stocks (i.e. stocks are undervalued), while if the S&P earnings yield is lower investors should sell stocks and buy the more attractive treasuries (i.e. stocks are overvalued).

The Fed Model was so named by Ed Yardeni of Prudential Securities based on the fact that some research at the Federal Reserve in the mid 1990’s used similar ideas.[1] But the model goes back much further than this and can be found in various forms in a number of security analysis books. In this sense, the term Fed Model is misleading, and the model is definitely not endorsed by the Fed.

The reality was since Greenspan also started with Clinton to introduce phony far too low inflation numbers which had to basic effects:
1. Governments payed less interest on back of the lenders who received far too less (and wage negotiations) were far too low, that’s why the income of middle and lower class income melted down over the last 20 years).
2. The part of the inflation not shown was put into the growth numbers of GDP and we saw an economical strength which never happened at that magnitude. Check out the link below to get an idea.

That lead to inflated stock markets and overvalued stocks. Wall Street was greedy enough to follow the concept of the emperor without clothes and were praying the mantra of this model on the way up.


~ by behindthematrix on October 8, 2008.

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