Stock market yield needs to be substantially higher than treasury to compensate for risks. Historically the risk premium is about 7%. That means if treaury yields 2.7% stocks should yield 9.7%. If not some players will conclude stocks are not worth the extra risks and will buy bonds and sell stocks.
1 Like
Iām not sure weāll get the inflation everyone thinks. Tax reform is a huge savings which will offset higher wages. That means inflation should stay relatively low. I think the bigger risk is the economy stalling, because we canāt find people for the 6M open jobs. Companies need to hire those people to keep growing.
Youāre reading 1950s textbook? Grahamās books?
Thatās from my corporate finance textbook from 2016. Actually itās the premium over 3 month T-Bill rate, not 10 year.
1 Like
3mo yield is much lower than 10-year.
T-bill is now about 1.4%. If you add that 7.2% to it that means stock should yield 8.6%.
1/0.086 = 11.6. Thatās the implied stock market PE.
2 Likes
1.42% + 7.2% = 8.62%
1/8.62% = 11.60 for P/E (ttm).
Sound like for DJ dogs.
Guess applies to AAPL since it is in DJ 
1 Like
I didnāt follow what you said. On the personal level, tax reform gives them a boost on disposable income. Higher wage will give them additional disposable income. How can they offset each other?
On the corporate side, tax reform gives them more profit and wage increase will be smaller than profit increase. Therefore, shareholders will be richer from dividend and appreciation.
This suggests inflation domestically. Chinaās cost is going up so supply side inflation is also there.
Product pricing is proportional to labor cost not disposable income.
Since businesses didnāt need to increase labor cost hence no need to increase product price, mean no inflation.
Increased disposable income means can buy more stuffs 
(not the limited supply houses, please) hence good for businesses 
Inflation comes from corporations increasing prices. When wages increases, companies typically have to increase prices. This time companies are getting a tax cut which lowers an expense to offset the cost of higher wages. If companies pay higher wages without increasing prices, then thereās no inflation. Itāll be a true increase in the standard of living.
Are you suggesting tax policy make businesses adjust margin? They do that?
Increase wages would increase the cost of producing a product. If they keep price steady, is effectively reduce margin.
So an increase of disposable income could cause a major inflation in asset prices and also the cost of priclvate schools. Home buyers will be wiling and able to bid more. Parents would go for the waiting list for private schools and the school increase tuition based on the length of waiting list.
Some businesses price based on the maximum acceptable price. They can get higher profit with a higher price and a flat labor cost
No. Iām saying the lower gross margin is offset by less taxes. So at the bottom, the net margin should be about the same without having to increase prices. Long-term, S&P 500 gravitates to an 8% net profit margin.
Damn, need to hurry up before rates go through the roof!!!
1 Like
1 Like
But for what itās worth, CoreLogic doesnāt see much of a correlation between mortgage rates and home prices and sales.
āIf you look at the relationship between [mortgage] rates and [home] sales and home prices, the relationship is almost zero,ā said Sam Khater, deputy chief economist at CoreLogic. āThatās shocking to most people. Even real estate people and finance people, they donāt understand that.ā
https://www.federalreserve.gov/monetarypolicy/fomcminutes20180131.htm
I donāt think they increase rates in March.
Come on, I need to lock in a great rate!!!
1 Like
Eek 4.4 is so high!
Itās 400/month more to buy the home I bought in 2016 with a fixed rate.
Factoring in appreciation as well as rate gain, it is 1000/month more expensive in terms of mortgage to buy the same home.
- plus 150/month extra property tax
- plus about 100k of mortgage interest now not tax deductible
Why are people who willing to pay SO much more today than even 2 years ago? What is going on??!!
I understand the price being high as lots of cities are very expensive relative to income. What Iām struggling with is not seeing what has changed vs. 2 years ago. Itās not like we were in a recession then and recovering now.
1 Like