“One Issue Which I Have Struggled Greatly to Understand Is the Question of Why Stock Valuations Have Remained Insanely High for Longer Than They Have at Any Earlier Time in U.S. History. Your Article Offers the Best Explanation That I Have Seen. The Federal Reserve Took Steps That Permitted Us to Maintain Our Illusions About the True Value of Our Stock Holdings for Far Longer Than We Would Have Been Able to Maintain Them Had the Fed Not Acted in Ways in Which It Has Never Before Acted.”

Set forth below is the text of an e-mail that I sent on March 18, 2019, to David Bahnsen, author of an article entitled Did the Financial Crisis End?:

David:

My name is Rob Bennett. I loved your article in the National Review titled “Did the Financial Crisis End?” I have been writing on the internet for 17 years about the need to shift from the Buy-and-Hold model for understanding how stock investing works to the model rooted in the research of Nobel-prize-winning economist Robert Shiller (I call this model “Valuation-Informed Indexing”). If Shiller is right that valuations affect long-term returns (ALL of the research supports this finding, nothing supports the idea that the market is efficient — that was an assumption, not a research-based finding), then stock investing risk is not static but variable and the earnings that investors get excited about in bull markets are Pretend Gains, fated to be blown away once the irrational exuberance that created them is inevitably transformed into irrational depression.

I believe that it was the relentless promotion of Buy-and-Hold strategies, which pushed the CAPE value to levels higher than those that brought on the Great Depression, that was the primary cause of the economic crisis of 2008. One issue which I have struggled greatly to understand is the question of why stock valuations have remained insanely high for longer than they have at any earlier time in U.S. history. Shiller published a paper in July 1996 saying that investors who stuck with their high stock allocations would live to regret it within the next 10 years. But here we are in 2019 with stock valuations still at nearly two times the fair-value CAPE value. How can this be explained?

Your article offers the best explanation that I have seen. The CAPE value hit levels never seen before and thereby threatened an economic crisis worse than we have ever seen before, even worse than the Great Depression. So the Federal Reserve stepped in with extraordinary actions to stabilize the economic system. But now we need to unwind from those extraordinary actions. And the unwinding also will cause great economic harm. So the process has proceeded very slowly, meaning that we have been able to maintain insanely high CAPE values for a longer time than ever before. Essentially, the Federal Reserve took steps that permitted us to maintain our illusions about the true value of our stock holdings for far longer than we would have been able to maintain them had the Fed not acted in ways in which it has never before acted.

Thanks for the effort you put into your article. I has helped me to deepen my understanding of these issues.

I have attached an article that summarizes my work of the past 17 years. It is called “Buy-and-Hold Is Dangerous.”  I would of course be thrilled if you would be interested in providing any feedback on it.

My best and warmest wishes to you and yours.

Rob