Dale,
Thats a pretty harsh response.
Firstly not everyone expects a 3/4 point rise. Futures players, who obviously are a lot more pressure to be right on the pulse, expect a 3/4 point rise. Stocks didn't rise 40% since october on the expectation of a 3/4 point rise. The average investor does not expect a 3/4 point rise.
Secondly, a 70% drop in the Nasdaq is not absurd. I am not saying it will happen. But it is a risk. A very high risk, and if it does happen a lot of unsuspecting people will get very hurt.
If it doesn't happen I'll be OK, hopefully a lot richer even. But if it does I won't be a lot poorer.
I'll give some good reasons why the drop may happen. Not necessarily that it will happen, but may happen:
PE is about 200. Historical average is 20. So one of four things must happen.
.... 1) People indefinately accept a higher PE as acceptable.
.... 2) The strength of the economy, low inflation and growth in profits brings the PE down to a more normal ratio.
.... 3) The indexes stays flat for the next 25 years (similar to 1966-82).
.... 4) The index suffers a 4-10 year contraction losing 70% of its value (similar to Japan 1990).
Any one of the above four is possible. To me number 1 is the least likely. It is new age thinking.
Number 2 is reasonable. The US, due to restructuring in the 80's, and due to its dominance of new technologies is increasing it's world share of the important future industries. Amazon can sell its books in any country in the world, at the expense of the local sellers, and Yahoo and AOL can advertise to and sell to people clicking from anywhere in the world. Also the new economy does have a deflationary effect. The information available and easy price comparison of the internet act to force down consumer prices.
Against number 2 is the down side of the new economy. Just as it has a deflationary effect for the consumer, the more efficient a market is, the more difficult it is for the producer to make money. I think todays economy is scarily similar to Japans in the '80s. They crashed because of, among other things, the Japanese principle of sacrificing short term cash flow for long term growth in market share. This sound principle failed when it turned out everyone was trying to expand into the same profitless markets, and nobody ever made a penny. The internet economy works almost the same. The principle of give it away free to build market share, sounds great. But again you bump into the fact that everyone is competing for the same market and nobody will ever make any money. With no cash flow, eventually the ocean of willing investors dries up.
Possibilities 3 and 4 are obviously the ones that I think are most likely. Number 3 is to me the best case scenerio, and number 4 the more likely. As absurd as a 70% drop in the Nasdaq sounds, it really is not that big a drop by historical standards. After exactly the same runup, the Nikkei dropped 70% over the course of 10 years. A 60% drop in the Nasdaq and investors would lose their last 1 1/2 years worth of stock market excesses. A 70% drop would set them back three years. Since '96 when Greenspan made his "irrational exuberance" comment about the stock market being overvalued, the Nasdaq has quadrupalled. |
