New York Fed Sees Five More Years Of Stock Increases

Tyler Durden's picture

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:

Why is the equity premium so high right now? And why is it high at all horizons? There are two possible reasons: low discount rates (that is, low Treasury yields) and/or high current or future expected dividends. We can figure out which factor is more important by comparing the twenty-nine models with one another. This strategy works because some models emphasize changes in dividends, while others emphasize changes in risk-free rates. We find that the equity risk premium is high mainly due to exceptionally low Treasury yields at all foreseeable horizons. In contrast, the current level of dividends is roughly at its historical average and future dividends are expected to grow only modestly above average in the coming years.


In the next chart we show, in an admittedly crude way, the impact that low Treasury yields have on the equity risk premium. The blue and black lines reproduce the lines from the previous chart: the blue is today’s equity risk premium at different horizons and the black is the average over the last fifty years. The new purple line is a counterfactual: it shows what the equity premium would be today if nominal Treasury yields were at their average historical levels instead of their current low levels. The figure makes clear that exceptionally low yields are more than enough to justify a risk premium that is highly elevated by historical standards.


Keep the above bolded, underlined sentence in mind for a second.

So let's fast forward to the authors' summary:

At face value, this result means that the models are actually helpful in forecasting returns. However, we should keep in mind some of the limitations of our analysis. First, we have not shown confidence intervals or error bars. In practice, those are quite large, so even if we could have earned extra returns by using the models, it may have been solely due to luck. Second, we have selected models that have performed well in the past, so there is some selection bias. And of course, past performance is no guarantee of future performance.

Actually, at "face value" the models have been horribly wrong at forecasting returns especially in situations in which confidence in the entire system collapses, and as a result five years later, the Fed, and all its central bank peers, are forced to inject more and more liquidity to keep the house of cards: both the market and the economy from imploding.

Which actually is also the biggest failing of the paper.

Let's go back to the bolded sentence above:

"The new purple line is a counterfactual: it shows what the equity premium would be today if nominal Treasury yields were at their average historical levels instead of their current low levels."

Looking at the chart shows that the Risk Premium would be negative in a "normal" environment - or one where bonds were back at their historical averages, where even the Fed, not to mention Congress and the President, see them reverting to one day when the Fed supposedly exits the market.  And what is most stunning about this entire paper authored by Fed economists, is that the authors completely ignore that the only reason the Treasury yields are low is because of the Fed's distortions of the bond market itself. In other words, nobody at the Fed has even the faintest understanding of recursive, circular logic, or what Soros famously pegged as reflexivity.

Which in turn means that the longer one chases stocks relative to a baseline "normal" risk free rate, the more negative the premium would be, and the greater the stock market fall, once things are allowed to normalize (if ever).

Perhaps, instead of coming up with this sad attempt at pitching stocks, the NY Fed were to come up with something relevant like where the 10 Year bond would be not only if the Fed was out of the market, but if it had never entered, the general public would have a sense of just how massively overvalued stocks truly are when factoring out the biggest artificial component to the "rally", and also why, intuitively, virtually everyone hates what has become a daily no volume levitation on nothing but the expectation that i) the Fed will continue the liquidity tsunami indefinitely and ii) the Fed will not lose control of the market and the economy, as it did in 2008.

Is it any wonder why the occupation "economist" (not really a job, more of a clerical position) and especially one with a political bent, sent here from above to justify an ever-encroaching government, and a ruinous central planning regime that only serves to perpetuate capital misallocation and wealth transfer from the middle to the upper class, has become the most pejorative "four letter" word in existence?

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flacon's picture

Hyperinflation raises all boats. 

LawsofPhysics's picture

...and starves the majority.  Water water everywhere and not a drop to drink. If all ya'll don't mind I am going to go over to the other side of the boat now.

Jekyll_n_Hyde_Island's picture

There's salt water and snow everywhere -- the muppets and sheeple have been gulping it down from the sides of their life rafts for 45 days, err 6 years, err forget it.

LawsofPhysics's picture

If only the global snowpack/ice sheets were increasing.

JethroBodien's picture

Nothing to see here move along

Just a minute someone is at the door...

Rubicon's picture

What does "pejorative" mean?

Jack Napier's picture

That the word 'bank' qualifies as a four letter word in more ways than one.

nobodyimportant's picture

They are increasing.  See

akak's picture

That is patent nonsense.  Glaciers and icecaps are melting and retreating worldwide, on every continent and in every region, and have been for over a century now.


EDIT:  I can only shake my head at the ideologically-drive no-nothings who downarrow me for pointing out an unassailable and undeniable scientific fact.  Your willful ignorance apparently knows no bounds.  Funny how all of the down-arrowers never actually respond to my statement of this fact, perhaps because they know that they cannot refute it.

And for the last fucking time, pointing out a scientific fact IN NO WAY implies that the person doing so is pushing a particular political agenda, or has any political agenda at all.

2nd Edit: Wow, 6 downarrows and counting!  And STILL no rebuttals, logical or otherwise!  The level of head-in-sand denial here is off the charts.

Doubleguns's picture

Are you kidding, a century? Really. How about more like several thousand years. My house sits in the Ohio valley that used to have mile thick glaciers. The cave man fucked up and started global warming with the flintmobil. 

akak's picture

I think you're forgetting about a number of intervening episodes such as the Little Ice Age, for example, during which Swiss alpine villages were overrun by advancing glaciers, and the Norse in Greenland were starved into extinction.

Shell Game's picture

LOL, holy crap.. really folks?  Talk about the cultural tryanny of political correctness - here it is in all its glory. 


Science 101:  The Earth is about 4.5 Billion years old.  Temperature and sea level fluctuations, glacial advancement/retreats, tidal patterns, weather patterns, tectonic plate movements - ALL have been occuring over for billions of years.  This planet is dynamic and ever changing.  Junkers: Get over it.

Aurora Ex Machina's picture


For the last 24,000,000 years, CO2 levels have been under 500ppm (that includes a couple of ice ages for the record, and unless you're blind, you'll notice that stuff like mammoths are no longer around).

In 200 years, CO2 levels have increased the  by 100+ppm, and have just hit 400ppm in certain places (notably: the Arctic, you might note it had a lot of frozen water once) and it's still increasing, and there's ample proof that this is impacting regional climates (further hint: the last ice age took ~100,000 years to end, it takes a long TIME for masses of ice to melt on their own, but if you put a heater next to it, you can certainly speed the process up. Like a putting an ice cube onto a hot stove)


Now work out how much time was required for each species to fill its ecological niches (allowing for mutations leading to species becoming new ones and the whole beautiful dance), and how many species died out and so on, and so forth, and how fast current ecologies are changing.

You might want to look up how long mammoths were around, or perhaps even how long it took for homo sapiens to appear. Hint: longer than 200 years.


If you can't grasp TIME involved, I'll help you out. When humans deliberately breed a species to fulfill niches (i.e. domesticated animals such as dogs, cats, horses and so on) and provide them with the perfect environment (i.e. pamper the living crap out of them, and remove all predators, parasites and so on) and actively select against any random mutations (i.e. cull the ones not fitting the model you're aiming for, and only breed from those, which certainly doesn't happen in the wild), it takes decades to centuries to achieve the goals, depending on the species and what you're aiming for.

When Rome fell, it took centuries for the breeding programs to regain a footing and produce a decent warhorse [wiki]. Now, tell me how a wild species will adapt to ecologies changing as rapidly as they are? Hint: you can't, because they cannot.

The planet is going through the 6th great extinction of species in the Earth's history, and your response is "SCIENCE 101".



Sorry, but you're an idiot. (And this post won't change your beliefs, because they're not scientific, just beliefs, but it might inform others). The ignorance of basic evolution and ecology is stunning in 'MURICA.


"Faith-based community" = "Nihilistic death cult" at this point, just for the record. What amazes me is the belief that God likes you trashing the Universe. Unless you worship Cthulhu, and even that one would prefer if there was something left to terrify.

Shell Game's picture

LOL, and your unreferenced load of coprolite is 'scientific'?  Say, how many peer-reviewed journals articles have you published?  As many as I have, I wonder?  You are a narcissistic dolt, be gone.

Aurora Ex Machina's picture what field? Please drop a link to a sample, I'd be interested, and I'll be highly amused if it's geology and nothing to do with biology (I smell an engineer or "oil sciences" man from your tone). If you want to call me out for not sourcing, that's highly ironic given your initial claim.

Coprolite? So... animal breeding is "unscientific" now? And it's not a demonstration of genetic manipulation? And it doesn't take X number of years? And it's not got a huge source of data via bloodlines that can be checked? Tell me more about your world of magical pixies where twelve thousand years(+) of domestication aren't anything to do with science. Please do.



Oh, and so much for your disdain for junkers; narcissistic dolt indeed. Way to blow out a crappy response that tackles none of the points raised by the way: as I said, belief not science being challenged.



p.s. You'll be wanting to source how quite a lot of geology is actually biological in origin, and so the biology of the Earth is fundamental to understanding the mechanics of it. Hint: oil, limestone, stuff like that. Life is part of your "dynamic system", and is the engine of a large part of WHY it's dynamic. It's not as if you don't have two other models (Venus / Mars) to compare it to either.

Shell Game's picture

Laconic, as usual..


Well, at first I thought you needed references for the fact (not theory) of a dynamic Earth.  But behold, you support this 'crazy' fact in your p.s. statement. 

Look, I'll take this one opportunity to cut through the bullshit and get to a root cause.  Humans overall are not the problem here, it is the insanity of an unsustainable growth mantra pushed by a very small percentage of humans at the top of the corporate food chain.  Your opposition (people like me) do not want that small percentage of humans who run everything to further consolidate power and financial wealth through fucking carbon taxation.  I'll assume here you are a progressive liberal... If your type and my conservative type actually joined - rather than gleefully partake in the great Divide - we could actually end the corporate takeover of this planet. 

I'm done, the next overly long post is yours...

Aurora Ex Machina's picture

Well, of course: my position is about reality, nothing more. And fish. Very not pleased at the oceans dying out and the untold wealth of genetic data within complex ecosystems and solutions to niche issues being wiped out for plastic toys, it's insanity. Oh, and climate change really is here, the scientists aren't lying; the planning is already in for the worst case stuff. I'm more Deep Green than you could probably imagine.

I still want to see your papers. When I say I'm interested, I don't lie.

But, No, I'm not a progressive liberal, although I support some of their points. As do I support some of "your team's". This is the problem: you're assuming a dialectic dualism where I'm in your spectrum. This isn't the case. I am what I am. Traitor to some, failure to others, just because I won't pick sides (and those sides really aren't the sides you imagine).


Still working within the egg until hatch date. The problem is, I don't think I fit any of your paradigms. It'll probably crash and burn, but it's always worth a shot at something new. (And I get told off for posting here, woof woof).



p.s. Of course humans are part of the problem. They create the systems, then can't see wide enough to steer said systems, or see the probable results of said actions. I don't think weak AI is your answer, btw. There's a reason I mentioned domesticated species, you might want to think on it...

LawsofPhysics's picture

Try walking into the back yard of our hunting cabin in the Canadian rockies (there use to be a Glacier nearby (when I went there with my dad in the 70's, it's gone now) or try some peer-reviewed material.  Let me guess, you think Wikipedia is a reliable source.  Morons.

Jekyll_n_Hyde_Island's picture

Bloomberg's buzzword of the day: "trade-at-rule"

  "Dark Pools are driving up to 40% of activity on the market, and yield is drying up in the public arenas."


  A trade-at rule is an attempt to quantify the forces that exist without specific measuring tools.


  The search for dark matter continues.


  Good luck making money in the oligarchic shark tank, nope, matter and energy bending black hole our markets have become.

Aurora Ex Machina's picture

Go see Iceland's Glaciers. (Example) I was watching seals swim in the famous Bond set while people were photographing the blue icebergs recently, and two companions couldn't muster even the enthusiasm to leave the rental car for more than 15 minutes.


I could only remember when it wasn't a lake.


The warm period from 1920 to 1965 caused great changes in Breiðamerkurjökull glacier. It retreated very quickly, leaving a lagoon up to 190 m deep where the glacier snout had been, and several kilometres of glacial moraines were exposed on both sides of the lagoon. The lagoon grew from 8 km2 in 1975 to nearly 15 km2 in 1998. Large blocks of ice break off the edge of the glacier, which is about 30 m high, keeping the lagoon stocked with icebergs.[source]


Still, I'm sure you can make a profit from it, it has done wonders for Icelandic tourism.

Martial's picture

May 09, 2018


CNN: "DOW Soars Past 50,000 with Better-than-Expected Starvation Report of Only 25,000".


WASHINGTON,DC- The US continues to recover as the DOW soars past 50,000.  DHS released their weekly death totals, reporting a 6-month low of 25,000 deaths inside the 200 plus FEMA camps located throughout the country.  Fuhrer Obama has again stated he expects Martial Law to be lifited at the end of the month and the constitution to be reinstated shortly after.

kridkrid's picture

Happy reading, everyone.
History doesn't repeat, but it does rhyme.

Fuh Querada's picture

....lifts all turds on tbe Ganges

SheepDog-One's picture

No possible way could I endure 5 more years of this insane bullshit.

Hopium Dealer's picture

A gallon of gas in 5 years: 6-7 dollars.

kliguy38's picture

add a zero and you may be close

nobodyimportant's picture


The "price" of gas is not increasing -- the value of the dollar is decreasing.

nevadan's picture

True story.  Melt value of a silver quarter is $4.32 today.  One gallon of gas aprox.  Same as it was when a silver quarter would buy a gallon of gas when I was a kid.

yogibear's picture

It's already getting close to that now. How about double the current price if not more.

venturen's picture

You are off in you meant 5 months!

ejmoosa's picture

I just set a personal record filling up my 1999 classic Expedition yesterday.  So it cost me more to fill my tank than ever before, and that is WITH record gas inventories across the nation.  If the supply/demand curve is not functioning properly(gas should be much lower) then the increase in price must be due to a weaker dollar and inflation.

The weak demand is masking the true amount of inflation already built into the price.


camaro68ss's picture


Bread will be $50 a loaf and the DOW at 50,000!



outamyeffinway's picture

That was my sentiment on CNN money re: Obamacare. It wasn't received so well. Truly swimming up the falls on that one.

CCanuck's picture

Bullish!!!  Buy Moar!!!!


monopoly's picture

Oh, just 5 more years. Well, I better get my short list ready. Did not realize it would be so soon.

We are so fucking doomed!

insanelysane's picture

I agree.  I didn't realize the tipping point was that close but...

When you think about it, stock market is being supported by Fed print and 401Ks and potentially a few remaining retail investors.

High income and middle income jobs are being replaced by low income jobs.  Low income jobs do not have 401k plans nor do they provide the worker with excess cash for retail investing so...

As boomers with high and middle income jobs retire, contributions to 401ks drop and...there is a need for the 401k plans to sell more than buy since the retirees are drawing out of the plans.

A look at the demographics probably does show that in 5 years, 401k plans will be selling more than buying, retail investors will have disappeared, and the Fed print machine may be able to print to infinity timewise but may not be able to print Infinite amounts of money for Infinity.

SheepDog-One's picture

I think if a Fed guy is out there yelling about 5 more years of stock ramping it will probably last about another month at most.

akak's picture

"Stock prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals."

"Stock markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that stock prices will probably continue to rise."

"We’ve never had a sustained decline in stock prices on a nationwide basis. So, what I think what is more likely is that stck prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though."

venturen's picture

what are you smoking...the stock market is cooling? 10% in 4 months that is a 30% per year with almost zero increase in economic activity?  

akak's picture

I was being sarcastic, of course, having substituted the word "stocks" into quotes by Bernanke on the housing market pre-2008.  Sorry if that was not obvious.

ejmoosa's picture

What would that return be again since we crossed DOW 14,000 for the first time?

Urban Redneck's picture

How did the Ministry of Truth not catch that, and correct it?


Benjamin Glutton's picture

So says the King of the Deadbeat Depositors....

eclectic syncretist's picture

I'd trust a mafia hit-man before I'd trust the NY Fed.

ejmoosa's picture

At least the Mafia has real targets that can be verified.

Yes_Questions's picture



New York Fed Sees Five More Years Of Stock Increases


and I see Zombie Bank People


Give us a break already. Just turn yourselves in.

Misean's picture

Wow, a great gawdam big sell signal!

yogibear's picture

The new normal has been more QE, which gets used to buy equities, which leads to short covering, which results in much higher prices.

The Fed has been laughing at any shorts while they get slaughtered. 

This goes on until the US dollar crashes big.

Dr. Engali's picture

These idiots just write shit to write shit. They never examine their logic, and their only motive is to sell stawks. For cripes sakes do you guys ever stop to think that if stawks were to go down that you might actually sell more? It's called a sale. Value investors look for them. What a bunch of imbeciles.