Thread by @MaMoMVPY

1/n Are US stocks overvalued? yes, 20-25% according to a simple variation of the Fed model I have estimated.

@euroinvestor

2/n I estimated Wilshire 5000 as a function of potential US NGDP, corp bond yields (Baa rated and 5-year ruling variance in US industrial production.

3/n Its not rocket science, but the model fits the historical development in US stock prices quite well. Interesting enough the coefficient on potential NGDP is nearly exactly one.

4/n given macro volatility is quite low and yields historically low it is hard to see much help from these factors going forward.

5/n since 2010 nominal GDP has essentially been on a straight 4% line and CBO is more or less forecasting this to continue over the coming decade. So the model would like indicate 3-4% nominal stock price returns per year over the coming decade...

6/n ...disregarding the fact that stock prices are 20-25% overvalued.

7/n Assuming this overvaluation will "disappear" over the coming decade we should expect less than 2% nominal stock market returns.

8/n IF that turns out to be true then suddenly 2% US 10-year treasury bond yields isn't that unattractive at all.

9/the end And remember this is not investment advice - it is just me fooling around with some simple models. That said, I am pretty sure that the coming decade will be more challenging for investors than what we have seen since 2009.

10/continued... I just did the same thing on US property prices. The model works fine (even though yields are not important).

11/n US property prices have now also become overvalued, but only around 5%, but it should be noted that the historical relationship between NGDP growth is only around 0.7 meaning that 3-4% NGDP growth going forward would imply 2.5% return on property prices.

12/n Again taking the initial 5% overvaluation into account it is probably fair to expect flat US home prices over the coming decade in real terms assuming 2% inflation.

13/n So also compared to property prices 2% bond yields isn't that crazy and it is in fact pretty hard to argue that on a relative basis US bond prices are overvalued.

14/n I am not arguing that bond yields shouldn't go up in the US. My only point is that there really isn't anything "unnatural" about 2% US bond yields even with inflation at 1.5-2%. The alternative simply isn't that interesting.