Re: Dow 36,000

Timothy Bates (
Mon, 27 Sep 1999 17:38:40 +1000

on 9/27/99 2:46 PM, wrote:

> A very interesting article is available online from Atlantic Monthly
> at
> (The article is in three parts, and the 2nd and 3rd parts are the more
> informative sections.)
> The authors analyze stock market prices using basic techniques of
> expected income stream and also risk premiums, and conclude that
> stocks are actually extremely UNDERvalued today (and always have been).
> By their model the Dow ought to be running at 36,000 or even more.

You need to look at the series of follow ups in the Economist. This guy's figure's are just wrong. That doesn't mean the Dow won't go to 36k or even 100k, but that his analysis is fundamentally flawed.

The reason for this is that is argument relies on very high leverage from future returns. Even minuscule variations in estimated long-run returns (from, say, 8% to 8.2%) can halve or triple the "predicted" current Dow. Within the margin of error, stocks are where they should be if (as this author assumes) the long-term returns are going to stay stable at historical long-term levels.

Two more logical claims for high Dow numbers are Dent (who uses demographic swings to justify his prediction) and the wired perspective. Dent has already raised his prediction from a massive 10k (predicted when the Dow was at less than half this amount), to high 30s. This renders his arguments rather suspect: it suggests that we are already well past the demographically justified Dow level (lots of educated working people and few children and old-people --> high Dow). The Wired perspective is essentially that we are approaching the singularity and wealth is going to increase exponentially simply because of this. TO my mind, this last is the most reasonable, but it suffers from too much rationalism, and overlooks theft, coercion, rebellion, etc. In other words, it thinks of us all as being reasonable instead of many of us being like Sadam Hussain. there is no law of nature that protects our individual freedom, and if this goes under, so too does the exponential wealth increase.