Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
“But there has also never in the history of the market been a time when we went to a P/E10 level in the 30s and did not see a price crash of 50 percent to 65 percent”
And there have never been two such crashes less than 80 years apart. Which means you’ll be reporting on the next one when you’re in your 130’s.
I am going to give a fuller response to this one because I think you are making a legitimate point here. It is odd to see two crashes within a short time-period. If we see another crash within the next year or two or three, that will indeed be the second one within 10 or 12 years. Why are we seeing things play out this way?
If Shiller is right (his research showed that valuations affect long-term returns), then stock prices are determined primarily by shifts in investor emotions, not by economic realities. If that is the case, then irrational exuberance is always going to be followed by irrational depression. It is high P/E10s that cause low P/E10s. It is bull markets that cause bear markets (and the economic crises that inevitably follow from them). There is nothing that we humans can do to avoid bear markets and economic crises except to permit discussion of the last 36 years of peer-reviewed research in this field and thereby prevent bull markets from developing in the first place.
Something kept the drop in P/E10 values that began in September 2008 from resolving itself. We saw only a drop to fair-value P/E10 levels, not a drop to P/E10 levels of one-half of fair value, which is where P/E10 values have fallen to in every earlier bear market before the full bull/bear cycle came to an end. It appears that what happened is that the Federal Reserve stepped in and pumped money into the stock market and then kept interest rates low in an effort to keep us from falling into the Second Great Depression. That kept the bear market from resolving itself. And so the emotional pressure that pulls stock market prices down to insanely low levels at the end of every bull/bear cycle remains in place today. It is only after we see that drop that the stock market will again be able to provide normal returns (6.5 percent real per year rather than the 3.3 percent real returns that we have been seeing for 18 years running now).
Investors are still evidencing an insane level of emotion today. We see that in every post that you Goons put forward here. The Federal Reserve has shown itself able to stretch out the bear market to a time-period longer than we have ever seen before. But it has not shown an ability to change the investor psychology that causes bear markets. So we remain at risk of a big price crash after having already experienced one not too long ago. Pumping up stock prices for a time does not change the underlying investor psychology. If anything, stretching out the bear market makes things worse rather than better.
The core question is always — Are stock price changes caused by economic realities or by investor emotion? If stock price changes are caused by economic realities, the market is efficient and Buy-and-Hold is the ideal strategy (and the safe withdrawal rate is always the same number). If stock price changes are caused by investor emotion, then the only way in which we can deal with economic crises effectively is to help investors rein in their emotional impulses. That is, we need to open up every investing site and blog on the internet to honest posting re the last 36 years of peer-reviewed research in this field.
Yes, it would be odd to see two price crashes within a short amount of time. But we allowed stock prices to go to levels never seen before in U.S. history in the late 1990s. The Wall Street Con Men have never pushed Buy-and-Hold as hard as they have pushed it in recent decades. So they have created circumstances more dangerous and more damaging that we have ever lived through before. The fundamentals haven’t changed. If the last 36 years of peer-reviewed research is legitimate research (I believe that it is), it is investor psychology that we need to focus on. We need to provide a counter to the relentless promotion of the pure Get Rich Quick “ideas” that have made the Wall Street Con Men so wealthy. We need to permit honest posting on the last 36 years of peer-reviewed research.
I hope that helps a small bit.
Rob
The goons must be controlling the Federal Reserve.
I believe that there’s a sense in which that is indeed true, Anonymous.
I believe that the Federal Reserve has kept interest rates down for a long time because doing so helps keep stock prices high and the Fed does not want to see the deepening of the economic crisis that would come with another price crash. So, yes, I think the Fed is playing a big role.
Are they doing it for goonish reasons? Not in a direct sense. They are good people and they want to help us all avoid the horrors that would follow from having millions of people lose 50 percent of their retirement savings. I am sympathetic to the people serving on the Fed. I understand why they are doing what they are doing, just as I understand why a lot of the experts in this field downplay the negatives of Buy-and-Hold. We all hate to see the human misery that follows in the wake of price crash. The members of the Fed are like all the rest of us. It’s easy to see where they are coming from.
But do you not see how we would all be so much better off if we never permitted prices to rise this high in the first place? If we had just permitted honest posting on the last 37 years of peer-reviewed research at every site, prices would have come back down to reasonable levels a long time ago and the Fed wouldn’t need to worry today about how to let interest rates rise again without bringing on a massive crash. If we launched a national debate on the meaning of Shiller’s “revolutionary” (his word) research findings back in 1981, when prices were at rock-bottom lows, we never would have even had a bull market, much less an economic crisis. When investors are able to learn how much overpricing hurts them, they become free to act in their own self-interest. When investors act in their self-interest, they sell shares each time prices rise and that natural, healthy reaction stops bull markets from developing in the first place.
There is no easy way to fair prices today. Letting interest rates rise will crash the market and bring on an ocean of human misery. Keeping interest rates down will delay the pain a bit but it will not ultimately avoid it; we will still need to pay the piper down the road a bit. Is it better to continue to live with a dark cloud over our heads?
It would seem better to me for us never to have permitted prices to rise to insane levels in the first place. But the only way to do that is to permit honest posting re the peer-reviewed research. Once we permit honest posting, we all live better lives from that point forward. But the Buy-and-Holders would have to acknowledge their mistake in thinking that the market was efficient for that to happen. And that’s always been the rub, hasn’t it?
The members of the Federal Reserve are like all the rest of us. They would love to find a way out of this mess. But the only lasting way out is for the Buy-and-Holders to acknowledge their mistake and then permit us all to post honestly about how stock investing works at every site on the internet. Everything else is a temporary move that does not solve the long-term problem. The answer here is permitting honest posting at every site. Of that I am 100 percent sure.
I hope that helps a small bit.
Rob
Will members of the Fed go to prison as well?
It’s not my place to say who goes to prison and who doesn’t, Anonymous.
You may have read yesterday that Bill Cosby is going to be going to prison. There was a day when seemingly smart people said that there was no way that that would ever happen. But it is going to happen. And the article that I read about it yesterday said that this means that there are a number of others who did similar things and who once thought that there was zero chance that they wound be going to prison who will now be going to prison. People who commit crimes with the thought that they will never get caught because they have powerful people on their side can be surprised when the rug gets pulled out from the powerful people. Then things can change fast.
I’m not taking any chances. I am making sure that there are thousands of statements in the record in which I say that honest posting should be permitted at every site on the internet. So I am covered if anyone is covered. The rest is out of my hands. If no one goes to prison, that’s good by me. If lots of people go to prison, I understand why others would insist on that given the circumstances that apply. I am going to do everything in my power to see that there are as few prison sentences as possible handed out and I am going to do everything in my power to see that the prison sentences that are handed out are as short as possible. But I am not going to go to the wrong side of the felony line myself. I saw how mad the Madoff investors got when Saint Bernie’s fraud was exposed and I don’t want to touch anything like that with a 10 billion foot pole. I would be truly grateful if you would try to find somebody else.
I hope that helps a small bit.
Felony-Free Rob
“I am making sure that there are thousands of statements in the record in which I say that honest posting should be permitted at every site on the internet.”
All of those statements are on this site. So no one sees them. Why don’t you make these statements anywhere else?
“It’s not my place to say who goes to prison and who doesn’t, Anonymous.”
What do you mean? You already told a bunch of goons that they were going to prison. It must be up to you, no?
All of those statements are on this site. So no one sees them. Why don’t you make these statements anywhere else?
I’ve made those sorts of statements at other places. People have seen them. Lots of people have seen them. In ordinary circumstances, statements like those would spread like wildfire. The benefits of permitting honest posting are so huge that people would want to get involved in helping out. They would tell their friends. Their friends would tell THEIR friends. The thing would go viral.
That hasn’t happened. That’s the hold-up. Most investors feel complacent about the situation. They think: “Oh, Rob might have a point here, some of the Buy-and-Holders really are over-the-top in their abusiveness. But what’s the big deal? Returns haven’t been so awful. Things are okay. And surely if there were a big problem, one of the big-name experts would have gotten involved. It’s not my responsibility to fix this problem. I am not going to get involved.”
Will that still be the attitude after millions of people have lost 50 percent of their life savings? I don’t think so. I think that at that point people will feel highly motivated to get to the bottom of this matter. So at that time the matter WILL go viral. Then our problems are solved. We will have suffered terribly as a result of the crash. That part breaks my heart. But we will never have to suffer through another crash from that point forward. We now know how stock investing works. Shiller supplied us with the huge missing piece in 1981. Now we just need to get the word out and we all live better lives. But we have to want to know how stock investing works enough to be willing to stand up to you Goons and today the motivation just isn’t there in the general population.
I hope that helps a small bit, my dear Goon friend.
Rob
What do you mean? You already told a bunch of goons that they were going to prison. It must be up to you, no?
I believe that a good number of you Goons will be going to prison in the days following the next crash. But I have zero say over whether that happens or not. And I have zero desire ever to acquire any say. The only way in which I expect to be involved is that I expect to argue for SHORTER prison terms on grounds that this matter was a society-wide problem and that you Goons got caught up in something bigger than you realized.
But I cannot guaranty that people are going to listen to what I say. My guess is that they will listen a little bit but that that will not be enough to keep you out of prison altogether. But it’s possible that I am wrong about that. Perhaps I will be able to keep you out of prison altogether. We will have to wait a bit and see how it plays out to find out for sure. There’s no other way to obtain a definitive answer.
Does that help?
Rob
“So at that time the matter WILL go viral.”
Okay, your plan is to do nothing until after the next crash. At which point you will swoop in and say “I told you so! Well, not here, but over at my blog, which you never heard of. You’re welcome. Send me $500 million please.”
What a plan. What a waste.
I’m incapable of posting dishonestly re the numbers that my friends use to plan their retirements, Anonymous. So there is zero chance that I could ever appease you Goons. There has been zero hope re that one going back to the morning of May 13, 2002.
What other options are available to me?
The option that I described is the way it works in the United States in every field of human endeavor other than stock investing analysis. I love my country, So, yes, that plan possesses a good deal of appeal to me.
But even if it didn’t, I would have to go with it given that no other options are available to me. Yes?
It’s not as if any of this mess was my idea. I have been saying since the morning of May 13, 2002, that we should permit honest posting at every site on the internet. I think it would be fair to say that that approach is what works best for every single person involved. Under that approach, each of us gets to decide for OURSELVES how to invest our retirement money. The Buy-and-Holders do Buy-and-Hold and the Valuation-Informed Indexers do Valuation-Informed Indexing. I think it would be fair to say that there are good reasons why as a society we have elected to play it that way in every other field of human endeavor.
If there is something that you want from me that I can give you, please just tell me what it is and I will be happy to help out. If you want me to say that the retirement study posted at John Greaney’s web site contains an adjustment for the valuation level that applies on the day the retirement begins, I would be truly grateful if you would try to find somebody else.
Does all of that not make a good bit of sense?
Sensible Rob