Nevertheless, it is still worth noting how avidly James Glassman and Kevin Hassett pushed their theory that because "dividend and earnings yields are dropping as the [equity] risk premium is exposed as superstition.... Stock prices... will continue to rise... a process that could easily lead to a tripling or quadrupling of the stock market in a very short time. Hence, Dow 36,000 or even 40,000 or 50,000." It was obvious to everyone at the time that Glassman and Hassett were confused about what "earnings" were and what "dividends" were, and so simply had their math wrong. As Clive Crook pointed out to Glassman and Hassett in May 1998: ">You're wrong, plain wrong.... Your reasons for believing that the Dow should be at 36,000 are wrong in the same way that it's wrong to say two plus two equals five.... Using your own method, provided only that you put the right variable into the formula, the market is about fairly valued."
At this point, Glassman and Hassett had a choice. They could admit that they had made a simple (albeit horribly humiliating) conceptual error in calculating their "36,000" number, or they could brazen it out. They chose to brazen it out, and wrote their book Dow 36000: The New Strategy for Profiting from the Coming Rise in the Stock Market, in which they told their readers that while "the Dow should rise to 36000 immediately" they were going to be cautious and only say that they "believe the rise will take some time, perhaps three to five years (p. 18)." Nevertheless, they told their readers, investors should "seize the opportunity now to profit from the rise in the Dow to 36000 (p. 125)."
Well, five and a half years have elapsed since Glassman and Hassett first misread the compound growth present value formula and staked themselves to "Dow 36000." Their time is up. So what do they say now?
Lo and behold, these days Glassman and Hassett claim that they never said that the Dow would rise to 36000. For example, on August 1, 2002: "The Dow is not at 36000 right now, and we didn't say it would be." This sentence fits very awkwardly with the claim on page 125 of their book that investors should act now to "profit from the rise in the Dow to 36000."
I noted when I read their August 1, 2002 article that Glassman and Hassett didn't dare to print the subtitle of their book: "The New Strategy for Profiting from the Coming Rise in the Stock Market" would have made their whoppers too transparent.
Pathetic.
Posted by DeLong at 11:00 AM
I understand why he still has a job at AEI (to a degree), but why does the Washington Post continue to publish Glassman? I mean isn't offering investment advice from Glassman akin to malpractice? But then I'd guess we would miss out on such advice as:
"Think of it this way: A company with a P/E of 20 has an earnings yield (E/P) of 1/20, or 5 percent. That means, the stock is producing $5 in profits for every $100 you invest. At a time when 10-year Treasury bonds were yielding 7 percent or 8 percent (that is, $7 or $8 for a $100 investment), a P/E of 20 may have been high. But today, a 10-year Treasury bond, by contrast, is producing just $4.50 in "profits" -- or interest.
Ten years from now, the T-bond will still be paying $4.50 in interest, but, if earnings rise at a rate of 6 percent annually, the stock will be generating $8.95 in profits; if earnings rise at 10 percent annually, $12.97. Yes, the bond is less risky, but the likely payoff in the stock far outweighs the risk."
Posted by Rob at September 16, 2003 11:50 AM
Sorry the link to such "insight":
washingtonpost.com
Posted by Rob at September 16, 2003 12:01 PM
That is too weird. Does Glassman assume that all corporate profits will be paid out as dividends? or does he assume that stock prices will rise in lockstep with corporate profits? A stock in a company with declining earnings could have a P/E ratio of 20 and the next year be at 30 if it earnings continue. Shouldn't he really look at earnings growth and growth potential? If the P/E stayed and 20 and the earnings did not go up, his math would be way wrong, but this is not uncommon.
No wonder people lost a lot of money in the stock market.
Posted by bakho at September 16, 2003 12:13 PM
Just by coincidence, Hassett was quoted on Bloomberg today, saying that the Fed is probably on hold for a good while (fair enough), but that if H2 growth surprises Fed members, they could hike rates in December. The FOMC press release today mostly ignored the recent improvement in non-labor economic indicators (growth risks still seen evenly balanced) while noting the deterioration in the labor market. I take that to mean they think the economy is far, far from the point at which inflation risks will become balanced again, despite an outlook for above trend growth through H2. Any chance Hassett really put on a small short in December Fed funds, just to cover himself?
Posted by K Harris at September 16, 2003 12:31 PM
"Does Glassman assume that all corporate profits will be paid out as dividends?"
Of course. Sadly, Paul Krugman and John Bogle pointed out the problem at once and were continually ignored by business reporters who gave "Dow 36,000" the broadest coverage.
Posted by anne at September 16, 2003 12:31 PM |
