Yet Another Method That Shows Stocks Are Expensive

You've probably heard this on cable financial news: A talking head defends his bullish view by citing the “Fed model”. The model — which is not endorsed by the Federal Reserve, by the way — says equities are cheap when there's a wide spread between earnings yields and Treasury yields. And Goldman Sachs analysts said in a recent note that it's getting attention, because of the 5-per-cent earnings yield on the S&P 500 and the 2.2-per-cent yield on 10-year Treasuries. But the logic behind that metric is fuzzy, to say the least.