Tyler Durden @ Zero Hedge:
Normally the New York Fed would not have to bother itself with such Series 7, 63-registration requiring, “financial advisor“-type things as predicting where the stock market will go, especially when it is its own trading desk that provides the impetus for more than 100% of the current equity rally. However, these are not normal times – they are New Normal. And as a result, Fed economists Fernando Duarte and Carlo Rosa have penned a “research” paper titled “Are Stocks Cheap?” in which they view the same reflexive “evidence” that Ben Bernanke himself used to answer a question during a recent press conference if he would still be buying stocks at record levels, namely the risk premium. This is what the NYFed’s economists say on the matter: “We surveyed banks, we combed the academic literature, we asked economists at central banks. It turns out that most of their models predict that we will enjoy historically high excess returns for the S&P 500 for the next five years.”
They find, not surprisingly, that based on various economist models, the risk premium has never been higher.
As a reminder, the equity risk premium is “expected future return of stocks minus the risk-free rate over some investment horizon.” It is this record high risk premium that leads the two to agree with Wall Street and to forecast that stocks have nothing but upside for half a decade more. Of course, what they try to not highlight is that the previous near all time high equity risk premium was seen in the days just before the Lehman collapse, when the same poll and the same models, would have predicted smooth sailing for a long, long time, instead of the 60% modest correction that transpired in the coming months, and which would have led to the end of the Western financial model as we know it if not for the same NY Fed injecting a little over $10 trillion into risk on short notice. But don’t worry, there is an economist “explanation” for this particular fly in the ointment: “It is difficult to argue that we’re living in rosy times, but we are surely in better shape now than then.”
So assuming one buys into the explanation that this time it’s different and “we are in better shape now than then” (even if said shape is purely due to the trillions in excess liquidity injected by the world’s central banks over the past five years, something which is completely ignored by the very same Fed’s economists), here is how an economists goes about justifying an equity valuation:
That’s very nice for Wall Street, our highest level government (ahem!) “representatives” and their elite pals in Washington DC.
Now when are they going to cover the problem of Depression level unemployment and the poor economic situation of the rest of America?
if I recall correctly people were saying the same thing just before the crash that began the great depression.