Re: Dow 36,000

Robin Hanson (rhanson@gmu.edu)
Thu, 21 Oct 1999 17:09:14 -0400

Max More wrote:
> > >The analysis at:
> > > http://www.econ.yale.edu/~shiller/peratio.html
> > > offers good reasons to suspect that US stocks will
> > > do very poorly over the next ten years.
>...
>I have to agree with John (and I continue to be 100% invested in stocks). I
>also see most technical analysis as little better than astrology. While I
>do not go along with the authors of "Dow 36,000", who argue that the Dow
>deserves to be at that level *now*, I do expect a continuing rise in stock
>prices over the next decade, barring bad policy errors (such as a big rise
>in protectionism, rising tax rates, etc.).
>
>A much better book, IMO, is "Dow 100,000" by Charles W. Kadlec. He uses
>economic analysis rather than technical analysis to make a case for Dow
>100,000 over the next 20 years --- a quite historically average gain of
>11.1% per year. Kadlec gives an excellent review of the economic,
>demographic, and policy factors likely to keep the stock market rising,
>despite short term set-backs. I find his case well argued and plausible.

I haven't read Dow 10K, though I did read the Amazon reviews, and I have read some of the Dow 36K articles.

Shiller is a very good economist, and I see no reason to call his analysis more "technical," vs. "economic," (whatever that means) than any of the many other analyses on this important topic. Noting the historical average of 11% is just looking at the average Y value of the graph at the URL above, and ignoring what the X value tells you. Now you might have reasons to think that the correlation the graph shows is spurious, but I can't see how just using the average Y value is somehow less "technical."

As Hal nicely pointed out, you really have to believe that the economy has changed in fundamental ways to justify current prices. You might decide that investors no longer demand a risk premium (the Dow 36K argument), or that computers, the collapse of communism, etc. have fundamentally changed the economy. Maybe, but do keep in mind all the reasons people had to believe in 1929 that the world had fundamentally changed. Arguably one of the century's best economists, Irving Fischer, published a book in '29 about how the world had changed, and he convinced Yale to invest all their endowment in stocks then. Ouch.

>Robin, would you care to make a Julian Simon/Paul Ehrlich style bet on
>stock prices ten years from now? (The difficulty will be in agreeing on an
>index to use.)

Doing this bet in the market, with each of us just investing according to our beliefs, would minimize our transaction costs and risks of not being paid. The main difference between a bet and straight stock plays is that bet losses are capped. But with the right options, we should be able to reproduce that in the market too. So, ... anyone know what the longest timescale is we can buy S&P500 or some such options in current markets is? If it's 10 years or more, we should do that.

Robin Hanson rhanson@gmu.edu http://hanson.gmu.edu Asst. Prof. Economics, George Mason University MSN 1D3, Carow Hall, Fairfax VA 22030
703-993-2326 FAX: 703-993-2323