You lost me with this assertion.
How could stock prices go to extreme levels unless there was a great deal of conviction that the levels were justified? According to a lot of people the stock market sees into the future and reflects expectations for it in current stock prices. In a period of economic health, wealth generation, and the resulting high confidence, is it so wrong to bid up stock prices to unusually high levels? What if the right moves were made by FED, Congress, and business? If you say that that wouldn't have made any difference, then please tell me why it is soundly believed that macroeconomic policy is useful.
During the '20s stock prices advanced like they always do, to excessive levels, and then they corrected back. If stock prices never returned to their previous highs, then one could consider the '20s a bubble. Otherwise, it has to be looked at as a break-out with a following shake-out. Therefore, the speculators of the '20s were right, but they used margin so they couldn't hold and that prevented them from realizing the great benefit coming in the future.
Talking about Tobin's Q, I think the ratio of stock market valuation to the value of the economy is still north of 1.0. In the past ratios of .75 were considered the cutoff for a bubble. Happened in 1929, 1969, 1973 and 1987.
According to my definition none of those years experienced a bubble. '69, '73, '87, were not according to the definition of most. There was little euphoria in '68 or '73. Other things were on people's minds. Back in the '70s you heard a lot of noise about the glory days up to the end of '68, but the market from '66 on was a mess. It was strong enough to fool you into playing, but most of what moved died out fast.
What do you know when you know the q?
Sometime in 1995 we passed it without damage and it got as high as 1.75 in March 2000, I believe.
Apparently nothing. You're better off with the A/D line.
What are your thoughts on Tobin's Q?
It's useless. Above you indicate that using the q one should have sold in '95 or maybe '96 or '97. According to my money numbers the Oct '97 break was the peak. Should I have told people they should sell? The key to knowing where stock prices are going is in guessing how stupid people can get. How smart they can get is finite. How stupid is unbounded, and you would be ostracized for resisting their stupidity. |
