The Fat Pitch by Macrofugue

This is the best thing you’ll read all day, a bullish take on the possible opportunities our recent crash may be affording us:

Equities are now cheaper than they were in 1998, or even 1987, 2002 & 2008 by measurement of Equity Risk Premium (earnings yield minus risk-free yield) of 5.86%.  The last time the ERP was this large, 1975, earnings actually declined 18% while prices rose 32%.  The significance of the equity risk premium is doubled with nominal rates so low:  pension funds, insurance companies & other institutions require 6-8% annual returns to be solvent, and with the 30-year UST yielding a miniscule 3.54%, it is difficult to see how they can achieve this without substantial allocation to more risky assets.  They buy, or have shortfalls.

I was around for all of the above-referenced “events” other than 1987 and can clearly remember the panic and atmosphere surrounding them.  I am of the opinion that Europe is not done getting worse but this post is today’s must-read regardless – I never restrict my reading to things that simply confirm my pre-existing opinions.

Run, don’t walk, to read the rest:

The Fat Pitch (Macrofugue)