Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at my site:
“valuations affect long-term returns”. Well, obviously. Today’s P/E or interest rate has some correlation to future stock or bond returns.
But that’s a far, far cry from predicting the stock market is going to crash by 50%+ in the next three years.
No, it’s not.
Shiller predicted in late 1996 that within 10 years those going with high stock allocations would regret it. The same conditions that applied in 1996 also applied in 2009. So it was equally possible to predict in 2009 that we would see a crash by 2019.
Shiller ended up being a little off. That certainly happens. Precise predictions are not possible. But Shiller peformed a huge public service by letting us know in 1996 that we would be seeing a stock crash and the economic crises that inevitably follows one 12 years before it came to pass. Had we acted on his warning, we could have avoided both the crash and the economic crisis. That obviously would have been a good thing.
The entire historical record says that we should expect another crash within the next three years. If we took action today, we could reduce the pain suffered in the crash and thereby mitigate the political fallout that will follow from it. I cannot tell you the day or month or even the year that the crash will take place. But it would be irresponsible to ignore the 36 years of peer-reviewed research showing that one is coming.
You want to paint things in either black or white. Either we can predict everything with perfect certitude or we cannot predict anything at all. Neither of those two things are true. We certainly cannot predict with certitude. But the entire history of the market shows that it is overvaluation that causes crashes (and economic crises). And we today are experiencing a level of overvaluation rarely seen in U.S. history. The risk of a crash is super-high. People need to know that. Not just investors. Anyone who cares about the future of our country needs to know it. People suffer in economic crises. We should be telling everyone what the last 36 years of peer-reviewed research teaches us about these matters.
Those are my sincere thoughts, in any event.
I naturally wish you all good things.
Rob
Anonymous says
“The entire historical record says that we should expect another crash within the next three years.”
You said the same thing several years ago. It never happened and you just keep moving the goal posts.
Rob says
Shiller went 10 years out with the prediction he made in 1996. So I follow the same practice.
Stock prices rose again to dangerously high levels in 2009. Go 10 years out and you are at 2019. Thar’s two years from now. That’s why I say that we should expect a crash within two years or so.
You are correct that, when you asked when I personally expected to see the crash, I said that I expected to see it by 2016. I never said that the historical return data guaranteed that we would see it by then (the historical return data doesn’t even guaranty that we will see it by 2019). I said that I PERSONALLY believed that we would see it by then. And I did. And, once again, as has happened over and over again throughout history, a personal short-term prediction re stock prices failed. Who’d a thunk it?
I have no better ability than anyone else to make personal short-term predictions re stock prices. But the 147 years of historical return data available to us for examination has a very strong record. The 147 years of data says that we will see the crash by 2019.
Maybe we will., maybe we won’t. I don’t offer any guarantees. But I am not going to bet against the entire historical record with my retirement money. Going by the evidence available to us today, that would be a very foolish thing to do. I think we should be telling people that.
Take care, man.
Rob
Anonymous says
“And, once again, as has happened over and over again throughout history, a personal short-term prediction re stock prices failed.”
You called for a crash by 2015. Then by 2016. Now by 2019, maybe. I’ve seen links from early 2010 where you called for a 65% crash. Strange how no matter where the market is, the coming crash is always 65%.
A market timer who can’t time the market has nothing to offer.
Rob says
All of the statements you make here are accurate, Anonymous.
The 65 percent thing is just a rough estimate. We always go to a P/E10 level of 8 before a secular bear market comes to en end. Today we are near 30. So we are looking at a likely price drop of a bit more than 65 percent. It’s a bit more than that today and it was a bit less than that at some earlier times when the P/E10 level was lower. It’s almost always been more than 50 percent. Where we are today is the worst we have seen in a long time.
I don’t think it makes sense to distinguish between times when the drop is likely to be 60 percent and times when the drop is likely to be 65 percent. These numbers are not precise. They are rough estimates. So it seems a little silly to me to act like there is some big difference between a time when the likely drop is 60 percent and a time when the likely drop is 65 percent. The point is that in both cases the risk of going with a high stock allocation is sky-high.
All Valuation-Informed Indexers are market timers who can’t time the market. That’s because we believe in using the peer-reviewed research as a guide to how to invest. There’s 52 years of research showing that short-term timing never works and there’s 36 years of peer-reviewed research showing that long-term timing always works. We take into consideration ALL the research, both the pre-1981 research and the post-1981 research.
I hope that helps a small bit, old friend.
Rob