Buttonwood

Why stocks are still cheap relative to bonds

The expected return on equities has rarely been lower—yet still outpaces bonds


Billy connolly, the great Scottish comedian who recently retired from performing, had a joke about two men filming a lion for a wildlife documentary. The lion suddenly looks up. The men fear they have been spotted. 

One of them slowly removes his boots and puts on a pair of running shoes. “You will never outrun a lion in those,” says his colleague. 

“I don’t need to outrun the lion,” replies the first man as he slowly ties his shoelaces. “I just need to outrun you.”

The joke rather neatly captures a particular approach to investing. What matters is not so much whether you can get ahead of some absolute goal for returns. The important thing is whether the asset you choose to invest in will comfortably beat the alternatives.

Share prices in America are at all-time highs. The cyclically adjusted price-earnings (cape) ratio, a measure of value popularised by Robert Shiller of Yale University, has only twice been higher than it is now—in the late 1920s and the early 2000s. 

Yet a recent study by Mr Shiller, Laurence Black and Farouk Jivraj suggests that today’s steep stock prices may still be warranted, because interest rates are so low. Indeed, compared with the real yields offered on risk-free government bonds, equity prices have plenty of appeal. 

Equities do not have to beat their historical returns to be worth holding, it would seem. 

They just need to outrun bonds by a decent margin.

A key strut to this thinking is that the earnings yield—the inverse of the price-earnings ratio—is a decent forecast of expected returns on equities. An empirical study in 1988 by Mr Shiller and John Campbell found that yields on equities help predict long-term returns. 

The dividend yield (ie, the dividend-to-price ratio) and three different measures of earnings yield all show some forecasting power, which is to say they explain at least some of the variation in future returns. 

The longer the horizon over which returns are measured, the better the prediction. And the best measure to use is an average of a few years of earnings, because profits are noisy from one year to the next. 

The use of an average of recent earnings goes back at least to Benjamin Graham, a pioneer of stock valuation. Mr Shiller’s cape is simply an extension of this approach.


The intuition behind the predictive relationship is straightforward. 

If stock prices are high relative to a measure of fundamental value, such as earnings, then subsequent returns tend to be low, and vice versa. 

A low earnings yield implies that investors are willing, at that point in time, to accept puny returns in the future. 

If you think this is trivial, consider the following. 

Low yields might instead be a forecast of bumper corporate profits. But they are not. 

This yields-predicts-returns analysis applies to assets other than equities, according to “Discount Rates” (2011), a panoramic survey by John Cochrane of the University of Chicago’s Booth School of Business. 

High house prices relative to rents signal low returns, not rising rents. 

Credit spreads on bonds are a signal of returns, not default probabilities.

All else being equal, you should be less keen to hold equities (or keener to hold fewer equities) the lower the earnings yield is. 

But not everything else is equal. 

The price of assets should equal expected cashflows discounted over the life of the asset. 

The earnings yield gives you the “expected” part of this equation; real bond yields cover the “discounted” part. 

The gap between these two is a forward-looking measure of the equity risk premium, the excess return for holding shares.

The chart shows a crude measure of this risk premium. 

It varies over time in large part because risk appetite varies over time. 

Although it has been higher in the past, it is not obviously low now. 

In the 1990s, during the dotcom boom, the premium for owning stocks was negative—real interest rates were a handsome 4%. Now real rates are negative. 

It is not hard to outrun that sort of yield. Mr Shiller and his colleagues use a similar measure, based on cape yields, and extend it to stockmarkets other than America’s. 

Their conclusion is that, despite high prices, equities are attractively priced relative to bonds—even in America, but more so in Britain, the rest of Europe and Japan.

A jump in real long-term interest rates worldwide would upset the whole constellation of high asset prices. It is hard to be confident that this is forthcoming. In an ideal world for investors, expected returns on all assets would be better. 

But we are where we are. If you can’t outrun the lion, perhaps all you can do is to try to outrun the other guy.

The pandemic

Who should get the jab?

The answer will decide not only who survives, but also the sort of world they will inherit



The urgency of vaccination against covid-19 is growing by the day. 

Two new variants of the virus, spotted in Britain and South Africa, are spreading around the world. 

Although they do not seem to be more deadly, they are a lot more contagious, threatening to overwhelm hospitals with patients too numerous to be treated.

Salvation lies in rapid vaccination. However, vaccines will remain scarce throughout 2021, even as deaths mount along with the sense that protection lies tantalisingly out of reach for billions of people. 

Getting the details right could save hundreds of thousands of lives. Getting them wrong will shatter people’s faith in their governments, in the benefits of public health and in the world’s ability to work together.

Start with government, where accusations have already begun to fly. Although Israel had inoculated 16% of its people by January 5th, France managed just 0.01% and the Netherlands has just started. 

In Spain Madrid used 6% of the vials it had received; the region of Asturias administered over 80%. 

In America, by January 7th, the federal government had shipped 17.3m doses, well short of its target. Only 5.3m people had received shots.

Part of the explanation is structural. A small country like Israel can move ultra-cold vaccine around without it spoiling. It has a digitised health system in which patients can easily be identified and contacted. America is large and federal, and its health care is fragmented. But incompetence has also played a role. 

Although countries have had months to get ready, they have wasted time and made mistakes. America’s federal government did not adequately fund the states to prepare for vaccination until just before the new year. 

In France, where anti-vax sentiment is strong, bureaucrats focused on consent instead of action. In some places vaccinations stopped or went slowly over the end-of-year holidays.

Given the lives at stake and the trillions of dollars lost to the world economy during lockdowns, governments must be creative. Open centres at night. If medical students, vets, laboratory scientists, dentists and retired medics have not been trained to inoculate, start now. 

Urge patients to fill out paperwork online before they arrive for a jab. Rather than threaten medics with losing their licence for breaking rules, encourage them to think for themselves. Learn from others. In 1947 New York City vaccinated 5m people against smallpox in two weeks.

Vaccination is also a test of public health. When the logistics are ironed out, as eventually they will be, the limiting factor will be how much vaccine is available. 

Pfizer, Moderna and AstraZeneca could provide a little over 5bn doses in 2021, enough for around 2.5bn people. More is needed, including over a billion doses of Sputnik V, from Russia, and two vaccines from China.

Both countries have offered vaccines widely, partly as tools of soft power. However, to fulfil their potential, they need to be licensed by an independent, rigorous regulator from another country or by the World Health Organisation (who). 

If countries sidestep licensing, as Argentina has with Sputnik V, too few people will trust vaccines to stop the virus. If they are licensed without proper trials, as a vaccine made by Bharat Biotech has been in India, vaccination in general may be discredited.

Another way to stretch supplies is to administer more first doses by delaying the booster, as Britain and Denmark will and Germany may. Critics argue that the vaccine may be less effective, undermining confidence in vaccination, and that exposure to partially protected people may help the virus acquire resistance.

Supporters say they have some evidence that delayed boosters will work and that immunology suggests people will retain plenty of protection against the virus.

To resolve this dispute requires real-world trials. Until such evidence has been collected, the who has rightly discouraged countries from delaying boosters except in the most desperate circumstances. Those could include the imminent collapse of many hospitals, as in Britain.

And vaccination is a test of whether the world can work together to confront common threats, such as organised crime and climate change. Developing countries have hosted clinical trials. 

Some of them, such as South Africa, which is undergoing a fierce outbreak, also make vaccines for multinational firms. They should share in their benefits. 

Modelling suggests that an optimal global distribution of vaccine according to need could save one and a half times as many lives as focusing supplies on rich countries alone. The more the virus is circulating, the more mutations there will be. 

Shortening the pandemic would boost the world economy. America and Europe have an interest in matching the diplomacy of China and Russia.

Early criticism about rich countries monopolising vaccines is harsh. Many ordered excess because they did not know which ones would work. The Pfizer and, to a lesser extent, Moderna vaccines require ultra-cold storage that many low- and middle-income countries lack. 

But by that logic, countries like Canada, which has five doses per Canadian, should release cheaper vaccines that tolerate higher temperatures, such as AstraZeneca’s, as soon as they can.

In this they should work through covax, a mechanism for pooling the purchasing and fair distribution of vaccines. It hopes to allocate almost 2bn doses this year. 

Ensuring it has the money to buy them must be a priority. covax hopes to inoculate the world’s 100m or so health-care workers by the summer. 

It will then need to find ways to dish out vaccine by need, which varies from country to country. A global scramble for vaccine that renders covax ineffective would lead to needless deaths.

Nerd immunity

The coming months will be hard. For as long as vaccines are scarce, vaccination will be the subject of conflict and uncertainty. 

If it is perceived to be chaotic or unjust, it will be taken as yet another example of how elites fail ordinary people. 

If the rich world monopolises supplies, countries will be set against each other. Either way, people would lose sight of how, within just a year of the coronavirus being spotted, 30 countries have begun to vaccinate against it. 

And that, after all, is something to cheer. 

The Truth About Trump’s Mob

The storming of the US Capitol by predominantly white supporters of President Donald Trump was in keeping with a long tradition of mob violence directed by white elites in the service of their own interests. The difference this time is that the rioters turned on their own.

Jeffrey D. Sachs


NEW YORK – The storming of the US Capitol on January 6 is easily misunderstood. Shaken by the ordeal, members of Congress have issued statements explaining that America is a nation of laws, not mobs. 

The implication is that the disruption incited by President Donald Trump is something new. It is not. The United States has a long history of mob violence stoked by white politicians in the service of rich white Americans. 

What was unusual this time is that the white mob turned on the white politicians, rather than the people of color who are usually the victims.

Of course, the circumstance of this rioting is crucial. The aim was to intimidate Congress into stopping the peaceful transition of power. This is sedition, and in stoking it, Trump has committed a capital offense.

In the past, such mob violence has been aimed at more traditional targets of white hate: African-Americans trying to vote or desegregate buses, housing, lunch counters, and schools; Native Americans trying to protect their hunting lands and natural resources; Mexican farmworkers demanding occupational safety; the Chinese immigrant laborers who previously built the railways and worked the mines. 

These groups were the targets of mob violence stoked by Americans from President Andrew Jackson and the frontiersman Kit Carson in the nineteenth century to Alabama Governor George Wallace in the twentieth.

Viewed in this historical light, the mob of righteously indignant “good old boys” who stormed the Capitol had a familiar appearance. As Trump put it in his speech fomenting the riot, they were out to “save” America. 

“Let the weak [politicians] get out. This is a time for strength,” he declared, deploying familiar riffs. “They also want to indoctrinate your children in school by teaching them things that aren’t so. They want to indoctrinate your children. It’s all part of the comprehensive assault on our democracy.”

Throughout American history, most mob violence has come not as a spasmodic explosion of protest from below, but rather as structural violence from above, instigated by white politicians preying on the fears, hatreds, and ignorance of the white underclass. 

As the historian Heather Cox Richardson documents in her brilliant new book, How the South Won the Civil War, this variety of mob violence has been a critical part of upper-class white America’s defense of a hierarchical society for more than 150 years. 

America’s culture of white mob violence goes hand in hand with its gun culture. The hundreds of millions of privately owned firearms in the US disproportionately belong to whites; and as the historian Roxanne Dunbar-Ortiz points out powerfully in Loaded: A Disarming History of the Second Amendment, “gun rights” have long been invoked by vigilante white mobs to suppress blacks and Native Americans.

Stoking mob violence against people of color is typically how rich whites channel poor whites’ grievances away from themselves. Far from being a specifically Trumpian tactic, it is the oldest trick in the American political playbook. 

Want to pass a regressive tax cut for the rich? Just tell economically struggling whites that blacks, Muslims, and immigrants are coming to impose socialism.

Trump has done precisely this throughout his presidency, warning that without him in office, Americans will “have to learn to speak Chinese.” At his rallies, he routinely champions the Second Amendment and rails against nonwhites, telling congresswomen of color to “go back” to the “totally broken and crime infested places from which they came.” 

He has urged his followers to manhandle opposition demonstrators, and to throw them out – not just from his rallies, but from the country itself. He has praised white supremacists as “very fine people.” After his Confederate-flag-waving mob stormed the Capitol, he said, “We love you, you’re very special.”

The Republican Party fully backed Trump and his politics of incitement right up until the afternoon of January 6, when the mob swarmed the Capitol. But Republican leaders’ fealty to Trump has not been driven merely by his hold on the party’s base. Trump represents the essence of the American right. 

His assigned role has always been clear: to stack the judiciary, cut taxes for corporations and the rich, and push back against demands for social spending and environmental regulation, all while inciting the baying mob to fight “socialism.”

January 6 went awry because the white mob turned on the white politicians themselves. This was unacceptable, but not unpredictable. Trump has repeatedly told his followers that they are losing America; and the Republicans’ loss of Georgia’s two Senate seats to an African-American and a Jew doubtless added to the rage.

Trump may have been unusually crude in his race-baiting, but his approach has been perfectly in keeping with that of the Republican Party at least since the party’s “Southern strategy” in the 1968 election, in the wake of that decade’s civil-rights legislation. 

Until last year, Trump was getting the job done for his party’s plutocrat donors, bosses, and business allies. The 2020 election was his to lose – and lose it he did. But the reason was not that he was too racist toward people of color; it was that he was overwhelmingly malevolent and incompetent in the face of a killer pandemic.

In the grand sweep of history, America is indeed turning the corner on its past of racism and white mob violence. Barack Obama was elected to the presidency twice, and when Trump won in 2016, he received fewer votes than his opponent. 

Between Kamala Harris’s election as vice president and Georgia’s Senate elections this week, there is strong evidence to show that America is gradually shifting away from white oligarchic rule. By 2045, non-Hispanic whites will constitute only around half of the population, down from around 83% in 1970. 

After that, America will become a “majority-minority” country, with non-Hispanic whites accounting for around 44% of the population by 2060.

For good reason, younger Americans are more cognizant of racism than previous generations were. The Trumpian virulence on display at the Capitol may have been dismaying. 

But it should be seen as a desperate, pathetic last gasp. Fortunately, the America of racist white rule is receding, if still far too slowly, into history.


Jeffrey D. Sachs, Professor of Sustainable Development and Professor of Health Policy and Management at Columbia University, is Director of Columbia’s Center for Sustainable Development and the UN Sustainable Development Solutions Network. He has served as Special Adviser to three UN Secretaries-General. His books include The End of Poverty, Common Wealth, The Age of Sustainable Development, Building the New American Economy, and most recently, A New Foreign Policy: Beyond American Exceptionalism.

Another Nail In The Coffin Of Big Cities

BY JOHN RUBINO 


The riots, political turmoil, and other banana republic embarrassments seem to be ending – for now. So let’s get back to examining the real problems of this hyper-leveraged, dangerously-complex world. Like how big cities might soon be obsolete:

Pretend it’s 2019 and you’re living in a major US city. You, your spouse and two kids have a fairly nice (though admittedly very expensive) apartment in a relatively safe neighborhood, and life is pretty good. 

There’s a park nearby, dozens of great restaurants within walking distance, and plenty of interesting friends. And of course your high-paying jobs are right there.

Then comes 2020. A pandemic causes your mayor to panic and lock down the city. 

There go the park, friends, and restaurants. And before the horror of this new normal has a chance to sink in, civil unrest explodes and turns your once-iconic neighborhood into a Mad Maxian war zone of burned-out cars and boarded up storefronts.

If it was just you, you might stick it out. But with a family, this life is now untenable. So you look into moving, preferably to somewhere semi-rural where neither a lockdown nor riots will ever be a problem and the kids can actually play outside. 

Maybe it’s time to indulge your fantasy of working remotely from a homestead in a gorgeous place.

But you immediately hit a technological speed bump: Broadband Internet, which up to this point had seemed both ubiquitous and a basic human right, isn’t available on the homesteads you now covet. The only option out there is low-tech, unreliable, molasses-slow satellite Internet that, if the reviews are to be believed, is worse than nothing at all.

You realize that if you want to keep doing your work at a high level, you’ll have to stay urban, or at best suburban, with all the health and safety risks that that now implies. Big cities and their burbs, it seems, will live on for a while as necessary places for sophisticated professionals to do their thing.

Then Elon Musk, of all people, announces that SpaceX, his privately held space launch company, is going to blanket the sky with thousands of low-orbit satellites to create a global broadband network, and the roll-out has begun.

Early reviews are better than good:

SpaceX Starlink Broadband Beta Testers “Amazed” By Its Speed

Photos are starting to leak from SpaceX Starlink beta users, who are trying the satellite broadband service in remote areas for the first time. So far, the beta testing appears to be going far better than that of full self-driving.

One beta tester shared his experience on Reddit after he brought his Starlink equipment to a remote forest in Idaho. There, he said he was able to achieve 120Mbps download speeds and access the Internet at lightning-fast speed.

He wrote that the service “works beautifully.” He continued: “I did a real-time video call and some tests. My power supply is max 300w, and the drain for the whole system while active was around 116w.”

At his house, he said he got 135Mbps download speeds when the dish was at a ground-level spot with “limited obstruction.”

“Given all the obstructions for this connection at the moment, I am amazed at how well it works. Streaming, low-latency video conferencing, and gaming are all completely accessible with this service. Even for the beta, it appears as though they’ve under-estimated Starlink’s capabilities, so I am excited to see it mature.”

This isn’t as fast as an urban gigabit fiber connection, but it’s more than adequate for Zoom calls, shared coding projects and the like. 

And since these are beta-test results, it’s a safe bet that the final product will even better.

The advent of Internet-everywhere couldn’t come at a worse time for some of the cities that are already seeing big outmigration. 

As Wolf Richter just reported, rents are already plunging:

“Exodus” Havoc: Rents Plunge in San Francisco, New York, Boston, Seattle, Other High-Cost Cities

In the exodus cities, rents continued plunging in December. For example, in San Francisco, the median asking rent for one-bedroom apartments fell 1.5% from November and is now down 28% from June 2019; in New York City and in Seattle, rents fell about 2.5% for the month and are down 21% from July 2019.

Rents are depicting the massive shifts playing out in the US housing market, brought about by the Pandemic and by working from anywhere and perhaps by a general urge to rethink things.

San Francisco rents in breath-taking downward spiral.

San Francisco remains the most expensive rental market in the US only because rents are also plunging in New York City. 

The median asking rent in December for 1-BR apartments dropped another 1.5% from November, and by 24% year-over-year, and by 28.5% from June 2019, to $2,660, according to data from Zumper’s Rent Report. 

In terms of dollars, the drop since June 2019 amounted to $1,060 a month.

This does not include the widely advertised incentives of “two months free,” or getting popular, “three months free,” which cut effective rents for the first year by an additional slice:


For 2-BR apartments in San Francisco, the median asking rent dropped by 2.0% in December from November, and by 22% year-over-year, to $3,500. Since June 2019, it has plunged by 27%, or by $1,300 a month, not including the incentives.

These are median asking rents in apartment buildings, including apartment towers. 

There are now reports of vacancy rates of 30% in luxury apartment towers in San Francisco, with landlords advertising “three months free.”


The financial implications of the emptying of big cities are immense. 

The list of cities and states that were already lurching towards bankruptcy via their wildly underfunded public sector pensions was already growing. 

And a federal bailout was already looking imminent before the chaos of 2020.

Now it’s a lock that in 2021 we’ll be faced with the choice of multiple municipal bankruptcies — which would threaten a national second Great Depression — or a multi-trillion-dollar federal bailout that threatens a currency crisis.

The next few weeks of relative peace are looking like a very temporary reprieve.