We investigate the stock market crashes in China, Iceland, and the US in the 2007-2009 period. The bond stock earnings yield difference model that the second author has used since 1989 is used as a prediction tool. Historically, when the measure is too high, meaning that the long bond interest rates are too high relative to the trailing earnings over price ratio, then there usually is a crash of 10% or more within four to twelve months. The model did in fact predict all three crashes. Iceland had a drop of fully 95%, China fell by two thirds and the US by 57%. The model does not call all crashes but has historically provided a correct crash signal when the measure is in the danger zone. The talk will also discuss the use of the measure since 1948 including its use for market timing to be in or out of stock markets.
Joint work with Sebastien Lleo.