Cheap Stocks Part Duex

The other day I suggested a good index for the relative price of stocks was Robert Shiller's S&P 500 price to earnings ratio multiplied by the 10-yr real rate on treasury bills.  When the index is much greater than one, stocks look expensive; when it is much less than one, stocks look cheap.

I couldn't easily construct a long series of that index because inflation-indexed treasuries haven't been around for a long time.  So I used the nominal t-bill rate instead.

But if I were using the real rate, today that index would be negative, because the real rate today on 10-yr treasuries is now negative.

Relative to throwing money away, earnings on the S&P 500 look real nice.

And with negative real rates extending over 10 years, I, like many others, lament our misplaced focus on debt and deficits.


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