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.