Bob's Daily Buzzword: `Fed Model'

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Aug. 6 (Bloomberg) -- Bob Rice, general managing partner with Tangent Capital Partners LLC, explains "Fed Model." (Source: Bloomberg)

-- one investment term to improve your vocabulary.

Our word today is "fed model." one argument that stock market bulls is using, they say stocks are cheap, even after the big run in the past few years.

What is the basic idea?

The basic idea is it compares to yield on stocks, that would be the inverse of the p/e ratio.

He says these are competing asset classes for investor dollars.

If the yield on stocks exceeds the yields on bonds, then stocks are revived because they can appreciate in value and bring the yield down to an equivalent number area wire are so many people getting this wrong?

It is a very interesting thing.

It worked for a very long time.

Alan greenspan refer to it a couple of times during his ten- year.

We have a chart here.

It does not work out so well in practice.

It is one of those wonderful series that sounds absolutely perfect and you can talk about the logic all day.

Let us look at the actual results.

This is the s&p 500, 10 year yield real return, sorted by the quintile of ten-year treasury yields over these ten-year periods.

I invested in a very low deal environment.

What happened to my investment over the next 10 years?

If you look at this chart, it is almost the inverse of what you would expect.

If you expect in the lowest yields, you get the lowest return.

The best returns over a ten- year.

Is -- over a ten-year period is in a relatively high interest rate environment.

Is that how wrong it turned out to be?

It shows that conventional wisdom was frankly -- was wrong.

You have to remember, you are telling all the bond guys they have it wrong because they are expecting low growth and low

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