What the equity risk premium measures, how Anacleto computes it from the CAPE and the 10-year real yield, and what its thresholds mean.
The equity risk premium compares what equities offer with what safe bonds offer. Anacleto computes it as the earnings yield (1 / CAPE) minus the real 10-year yield on US government bonds. A CAPE of 25 means an earnings yield of 4%; if inflation-protected bonds pay 2%, the premium is 2 percentage points.
The CAPE looks at equities alone. The premium adds the alternative: the same CAPE is more demanding when bonds pay 3% after inflation than when they pay nothing. When rates rise quickly the premium can turn red even if prices have not moved.
It inherits the limits of the CAPE (US earnings, smoothed over ten years) and assumes that today's real yield is the right yardstick for the next decade. Read it together with the Shiller CAPE.