Good article; Thanks for the reference.
I think the author has come up with a great explanation of why the risk premium for equities has fallen and will likely continue to result in historically high PE ratios (translating to historically low yields).
It's important to point out, however, that the 4% target returns the author proposes have some stronger assumptions built in. Central to this thesis is this statement: "Now, I’ll be the first to acknowledge that the 6% number is likely to be lower going forward. In fact, that’s the whole point–equity returns need to be lower, to get in line with the rest of the asset universe."
In my opinion, this is an over-simplified conclusion from his thesis. What *can* be said is that "equity returns should converge with returns on the rest of the asset universe." The author is simplifying this by saying that other asset returns are immutable, therefore equity yields must go down - it's an "all else being equal" argument.
His thesis, however, can also be true if other asset prices drop (i.e., their returns increase) and equity returns stay constant.
This is what happens, for example, if technology advancements goose earnings growth in the equity sector. This will pull money from other asset classes into the equity market, causing prices of those asset classes to fall (and yields to commensurately rise, all else being equal).
The author's thesis could *then* be applied to say that the equilibrium point for equity prices that will be found will be at a higher PE than the historical average (i.e., when the implied yield is closer to the yields of other asset classes). So over time, as the impact of the technological advancement wears off, all yields might sink in unison toward a lower equilibrium point.
A separate factor which I've pondered is the impact on growing wealth: Assuming that the world economy continues to grow, the amount of wealth held by people will grow, too (members of this forum are symptomatic of this phenomenon, IMO). As wealth grows and the demand for invest assets rises, asset prices will be driven up (also leading implied yields to fall). This is an offsetting factor that can increase returns for current investors who bought at lower prices.
To me, the system appears sufficiently complex that any blanket statement that suggest a fixed constant target return is likely to be inaccurate. There are so many factors that interplay that it's very hard to predict an outcome.
