Deep Store

Robert Shiller's Excess CAPE Yield (ECY), introduced in his 2020 paper "CAPE and the COVID-19 Pandemic Effect." It answers the most common critique of CAPE: that it ignores interest rates. Formula: `ECY = (1 / CAPE) − real 10-year bond yield`, where the real bond yield is the long-term Treasury rate (Shiller GS10) minus trailing 10-year inflation (CPI CAGR).

Why it matters: Plain CAPE has spent the post-2009 era at "historically expensive" levels and has been wrong as a market-timing signal — because real bond yields were near zero or negative, making *any* equity earnings yield look attractive. ECY puts CAPE on the same scale as the real return on bonds, so you can read "are equities cheap or expensive *given what bonds are paying*?" as one number. Shiller showed ECY explains forward equity returns better than CAPE alone in low-rate regimes.

How to read it: Higher = equities offer a bigger real-return premium over bonds = relatively cheap. Lower (or negative) = the equity premium has been bid away = relatively expensive. Long-run averages sit around 3–4%. Sub-2% has historically marked late-cycle excess (1929, 1999); negative readings are rare and signal stocks priced below the real risk-free rate (only seen in extreme bond bubbles). Compare side-by-side with raw CAPE — when CAPE looks high but ECY looks normal, rates are doing the work.

Caveats: Inherits CAPE's accounting-regime drift (1990s GAAP changes lowered reported earnings, mechanically raising CAPE and lowering ECY). The "real yield" component uses *trailing* CPI as a proxy for inflation expectations, not market-implied breakevens — Shiller's choice for consistency across 145 years, but post-2003 you could argue T10YIE is a cleaner real-yield input.