John Early's  Instablog

John Early
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Have managed money for clients as an independent advisor since 1991. Published a newsletter ECONOMIC LEADS from 1988 to 1993. Have an economics degree from Vanderbilt University. Focus on the macro picture forecasting the US economy and broad stock market. Also have a model to estimate long term... More
  • Histogram To Go With: Interest Rates Make Stock Bubble Bigger Than 2000 And 1929 0 comments
    May 20, 2014 5:58 PM

    Justin Hohn inspired making a histogram to see the distribution of the residuals between the PEses measure of stock market valuation and the estimate of the PEses based on the 10 year T-Bond yield.

    (click to enlarge)

    In making the histogram I decided to take the log differences between the PEses and the estimate. I believe this is a more consistent way to look at the residuals. It also means the current valuation labeled as being 58% above the red best fit line in the article is only 2.6 standard deviations above the red best fit line rather than more than 3 as I stated in the article.

    The distribution is somewhat normal; 77% of the residuals are within one standard deviation.

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