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Pastimes : DOW 36000 - Glassman and Hassett
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To: noiserider who wrote (36)1/14/2000 9:03:00 AM
From: noiserider  Read Replies (1) of 42
 
A good article from the AEI pro and con for Dow 36000.

theamericanenterprise.org

Excerpt from Lindsey:

If we could assure people that the Dow would keep rising at a 27 percent annual rate, most Americans would borrow all they could and invest it in the market. Home equity lines, available at 9 percent, would be an easy and profitable source of credit. Indeed, it would even be rational to run up credit card balances and pay an 18 percent rate to the bank or credit card issuer in order to put money into the market.

Now comes the real problem. If a 27 percent appreciation in the Dow was generally expected, who would provide the funds at 9 percent for a home equity loan or 18 percent for a credit card loan? Lenders would begin to demand the same rate as they could get in the market. The only remaining source of funds would be for people to cut back on their spending, while keeping their income the same. But if this were to happen companies would soon find that they weren?t selling as much as they had expected. Profits would fall.

Then the already stretched price-earnings ratios in the market would become even more extreme. As disappointing earnings reports began to accumulate, investors would no longer be willing to pay as much for equities. This would bring equity prices back into line, and the dream of a Dow zipping to 36,000 would evaporate.
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