tag:blogger.com,1999:blog-6837159629100463303.post2422877794081498577..comments2023-06-18T01:25:08.748-07:00Comments on Information Transfer Economics: The S&P 500 since 2017Jason Smithhttp://www.blogger.com/profile/12680061127040420047noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-6837159629100463303.post-90850429742729134162019-11-25T01:41:12.162-08:002019-11-25T01:41:12.162-08:00I'm glad you liked it. I just put up a blog po...I'm glad you liked it. I just put up a blog post about it earlier tonight. It is poorly written and very likely silly, but it gets my thoughts out there a bit. <br /><br />https://thehonestbrokernet.wordpress.com/2019/11/25/an-exact-approach-to-macroeconomics/Antihttps://www.blogger.com/profile/17677035271760844211noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-83661565920575118412019-11-24T16:58:38.438-08:002019-11-24T16:58:38.438-08:00Thanks Mike.
That NGDP-S&P yield graph is a ...Thanks Mike. <br /><br />That NGDP-S&P yield graph is a remarkable correlation. One thing that's interesting to me is that segment in the late 60s/early 70s where S&P 500 yield is relatively flat. That actually corresponds to what looks like a major negative shock to the S&P 500 (or a series of smaller negative shocks) dynamic equilibrium that seems unrelated to most other macro shocks.Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-58812742346199024582019-11-23T18:24:23.042-08:002019-11-23T18:24:23.042-08:00That 17% number is about right. I calculate it lik...That 17% number is about right. I calculate it like this: <br /><br />[S&P 500 discount rate / (S&P 500 discount rate - change in NGDP growth expectations)] -1 <br /><br />[~.043 / (~.043 - ~.0063)] - 1 = ~17%<br /><br />The most recent YOY PCE inflation rate was about 1.73%, so that would mean real GDP growth potential was at least ~3% over this period. <br /><br />That calculation of mine is just the arithmetic equavalent of using a discounted earnings formula based on an integral, and using current earnings as the multiplier. The discount rate is the same as the earnings/yield ratio.<br /><br />An interesting potential implication is that there is a related equilibrium condition in which the E/P ratio for the S&P 500 should equal NGDP growth expectations at any given moment, in monetary equilibrium. Divergences would signal a monetary disequilbrium condition. <br /><br />For example, I created these simple graphs:<br /><br />https://pbs.twimg.com/media/EJ1z3EnWwAEHsTj?format=jpg&name=large<br /><br />https://twitter.com/mike_sandifer/status/1197240471313096707/photo/2<br /><br />I already had thought that r* should equal NGDP growth expectations, in monetary equilibrium, so if I'm correct, the above is another equilibrium condition.<br /><br />Obviously, at this point, some econometrics will need to be applied to make a case that is at all convincing. It's just a hypothesis at the moment.<br /><br />By the way, he Bretton Woods period doesn't count, due to the fixed exchange rate regime. <br /><br />I should address a particularly outrageous potential implication of my nacent hypothesis, which is that, if correct, one could start to argue E/P is the best indicator for ROR on the stocks, and hence the equity premium puzzle is solved. The equity premium would go away in monetary equilibrium.<br /><br />The logic behind these equilibrium hypotheses is as follows:<br /><br />If a security existed that paid a dividend equal to NGDP growth expectations, investors should be indifferent between it and risk free bonds. The risks would be equal and opposite.<br /><br />The same would be said for risk free bonds and equities, if my hypothesis isn't silly. If there were either perfect monetary equilibrium at all times, or if the risk of inflation and disinflation shocks were equal, risk would also be equal.<br /><br />It's likely I'm making a simple mistake somewhere, and/or that I'm just some combination of crazy, stupid, ignorant, and naive. <br /><br />I know you're not a believer in the old quantity of money theory, at least the simple version, as usually stated, but correlations here with MZM velocity are also interesting to me.Antihttps://www.blogger.com/profile/17677035271760844211noreply@blogger.com