Hi Jason,

I like the fact that you've looked outside the box for a better answer to what is clearly a sub-optimal basis for building return expectations. However, I struggle to see how economic statistics can be used as proxies for expected returns.As someone previously commented, they are not known in advance (whereas you know the yield on a 10 year bond today), but neither are they reliable as they are based on imperfect data collection, and neither do they reflect what investors expect (which is really what we are talking about establishing here).

Then there is the puzzle about equities. From what research I have read and the little I have observed myself, there is a correlation between bonds and GDP growth but a very messy relationship with equities that would imply the equity risk premium is sometimes negative regardless of whether you were using bonds or GDP as the base return rate.

Which brings us to what I think is the bigger issue - how do you model return expectations when investors will often pay a premium to take risk (think mining exploration, biotech or lottery tickets and the valuations they can attract relative to a profitable, well-established industrial) AND a premium to avoid risk (as appears to be the case with bond markets currently).

Another problem to grapple with!