Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
<em>“If the CAPE drops to 8, as it has by the end of earlier bear markets”
And if disco comes back, my Donna Summer records will be worth a fortune.
Why do you hang your entire existence on CAPE, but completely ignore Excess CAPE Yield, which says stocks are currently a better deal than bonds.
Shiller has positioned himself so he can claim to be right no matter what happens. People see right through such duplicity. A book on Shiller will never sell, even if it finally gets written (doubtful) and published (impossible).</em>
I don’t quite follow what you are getting at when you say that Shiller has positioned himself to be right no matter what happens. My guess is that you are unhappy that he has not said when the crash will come. So, if crashes arrive randomly, we will sooner or later see one and he will be able to claim “credit” for it. If Shiller is right about how the stock market works, then that’s just the way things are. If stock prices are determined by shifts in investor emotion, how could anyone say when a crash will come? Emotions are by definition irrational and thus unpredictable. No one can predict when emotions will shift. So no one can predict when a crash will come. It’s just not possible.
The mistake that the Buy-and-Holders make is in thinking that, since we cannot predict when a crash will come, we cannot effectively assess when the risk of a crash is greater. When an alcoholic drives home from a bar, the odds are that he will not get into an accident. There are probably alcoholics who have driven drunk ten times in a row without incident. Does it follow that drunk driving is safe? It does not. The odds of getting in an accident might go from one in a thousand for a sober driver to one in ten for a drunk driver. So driving drunk is insanely risky. It’s the same with going with a high stock allocation at times of crazy high CAPE values. You can do that numerous times and suffer no negative consequences. But then you can lose 75 percent of your life savings in a crash and that will set you back in a big way for the remainder of your lifetime. You would have been better off to assess how much extra risk you were taking on when the CAPE value went to crazy places and to have worked to keep your risk profile constant over time (which would require market timing).
Your comment about Donna Summers records suggest that you see a CAPE level of 8 as something that comes in and out of fashion. Economic crises are not something outside of us that just happen now and again. We CAUSE economic crises with our love of Get Rich Quick/Buy-and-Hold investment strategies. The market is going to get the price right sooner or later. That’s what markets do. There is no getting around it. The natural thing to do is to adjust our stock allocation in response to price changes to keep our risk profile constant. When we refuse to do that (which is what the Buy-and-Holders advise), we make the market dysfunctional. When it can find no other way to get prices down, it eventually crashes them. That causes a massive loss of consumer buying power, which causes an economic contraction. All these things are connected. They are inevitable in a world in which open discussion of the last 40 years of peer-reviewed research is prohibited.
Lucky for us, they are NOT inevitable in a world in which honest posting is permitted. Permit honest posting and all the bad stuff about stock investing goes away. The crazy ups and downs in prices are OPTIONAL. In a functioning market, there would be small ups and downs as the market tested various price levels. But none of the crazy stuff. Because the market would possess the ability to ADJUST when investor emotion got too out of hand. Buy-and-Hold takes away that ability to adjust. Which produces pleasant results in the short term. And then terrifying results in the long term. It is not a coincidence that things have always gone like that. It is a logical impossibility that things could ever play out any other way.
The wonderful thing is that the last 40 years of peer-reviewed research teaches us for the first time how the stock market really works. Knowing that, we can all live richer and better lives than we ever imagined possible at earlier times. But to reap the benefits of our good fortune we need to permit honest posting. Which most of us have always wanted! You Goons are only 10 percent of the population. The vast majority of us are Buy-and-Holders. You have that working for you. But the vast majority of us support the laws against death threats and extortion and so on. Our sympathies for Get Rich Quick investment strategies have kept you Goons in business for 19 years now. But, when prices drop below fair-value levels, there is no more Get Rich Quick element at work. At that point, I believe that the sympathies will change and the majority will favor the enforcement of U.S. laws in discussions of investing. That will change everything in short order.
I hang my hat on Shiller’s model for understanding how stock investing works. The difference between the two models is that Shiller’s model posits that investors are highly emotional while Buy-and-Hold posits that investors are 100 percent rational and act in pursuit of their self-interest. Everything else follows from that. It is true that the relative appeal of stocks increases when interest rates are low. But, if we just permitted honest posting, stock prices would never get so high that we would need to lower interest rates to such a crazy extent to keep the stock market afloat. The way to deal with the craziness of today’s stock prices is not to spread the craziness to other markets. It is to permit honest posting and thereby empower investors to rein in their irrationality.
That’s my sincere take, in any event.
Rob
feed twitter twitter facebook