"Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

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"Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by nisiprius »

In 2000, in Dow 36,000, Glassman and Hassett wrote:
A sensible target date for Dow 36,000 is early 2005, but it could be reached much earlier.
What's more interesting to me than the ludicrously failed prediction is their reasons for the prediction. They said, all verbatim quotes:
  • The truth is that, over the long-term, stocks are no more risky than bonds or Treasury bills, so…
  • With this in mind, investors in recent years have begun to act more rationally, bidding up the prices of stocks and driving down the premium they had demanded when they believed stocks were risky, and…
  • Soon, prices will rise to where they will be “perfectly reasonable”—around 36,000 on the Dow Jones industrial average.
They also said, explicitly,
The Dow 36,000 theory depends on the risk premium for stocks disappearing.
Well, what happens after that? I don't think the book, which is unrelenting cheerleading for stocks, ever discusses this. But the equity risk premium can only disappear once. The rise to Dow 36,000 would be a one-time event. (Unless of course, it reappears, which would cause the stock market to tank). So presumably once the equity risk premium has disappeared, stocks and bonds would have the same long-term return forever after.

So it was interesting to me to read one Hannah Erin Lang, in The Wall Street Journal:
The Extra Reward for Owning Stocks Over Bonds Has Disappeared
The equity risk premium, often defined as the gap between the S&P 500’s earnings yield and that of 10-year Treasurys, turned negative in late December for the first time since 2002 and sat last week at negative 0.15 percentage point.

The metric is based on a calculation of how much stocks yield, which is derived by dividing the stock market’s expected earnings by its price. The earnings yield is then compared with the yield on government debt.
The difference between stock and bond earnings yields shows how much investors are compensated for the additional risk of owning stocks over relatively risk-free government bonds....
In other words, in 2010-2024 we got all of the equity risk premium we're ever going to get?
Last edited by nisiprius on Tue Jan 28, 2025 6:28 pm, edited 7 times in total.
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Re: "Dow 36,000" was predicated on ERP disappearing. What was supposed to happen then?

Post by ScubaHogg »

nisiprius wrote: Tue Jan 28, 2025 8:25 am The rise to 36,000 would be followed by a future without an equity risk premium, in which stocks and bonds, being equally risky, would have equal return.
Equal return or equal risk adjusted return? What was their claim? I never read the book
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Re: "Dow 36,000" was predicated on ERP disappearing. What was supposed to happen then?

Post by nisiprius »

ScubaHogg wrote: Tue Jan 28, 2025 8:28 am
nisiprius wrote: Tue Jan 28, 2025 8:25 am The rise to 36,000 would be followed by a future without an equity risk premium, in which stocks and bonds, being equally risky, would have equal return.
Equal return or equal risk adjusted return? What was their claim? I never read the book
The bullet points are verbatim quotes. The claim was my first quote, also verbatim: "A sensible target date for Dow 36,000 is early 2005, but it could be reached much earlier."

The equity risk premium has various definitions, but the WSJ article says it's the difference between stock returns and 10-year Treasury returns. If the equity risk premium disappears, that means it's zero, which means the returns are equal. I'm never quite sure when people talk about the ERP whether they are referring to a backward-looking ERP reflecting the past, or a forecasted ERP...
Last edited by nisiprius on Tue Jan 28, 2025 9:20 am, edited 1 time in total.
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Re: "Dow 36,000" was predicated on ERP disappearing. What was supposed to happen then?

Post by psteinx »

IIRC, the basic contention of the book is that because over very LONG periods (20 or 30 years or so), equity always equaled/outperformed bonds, that therefore equity was no riskier than bonds (i.e. ~30 year risk matters more than ~1 year risk), and therefore the equity premium should go to 0.

Besides the rather unlikely contention that risk over periods shorter than ~30 years doesn't really bother people, the outperformance of equities over ~30 year periods *depends* on a fairly high ERP. If equity prices had been much higher, historically (or equity prices the same and bond yields higher), then equity would not have always outperformed over those ~30 year periods.

===

It's a bad book, but I enjoy bad books from the past, to see what people got wrong then (and how), and to some extent, to frame current thinking about the future. See also, for instance, "The Population Bomb".
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Re: "Dow 36,000" was predicated on ERP disappearing. What was supposed to happen then?

Post by Harmanic »

psteinx wrote: Tue Jan 28, 2025 8:43 am IIRC, the basic contention of the book is that because over very LONG periods (20 or 30 years or so), equity always equaled/outperformed bonds, that therefore equity was no riskier than bonds (i.e. ~30 year risk matters more than ~1 year risk), and therefore the equity premium should go to 0.

Besides the rather unlikely contention that risk over periods shorter than ~30 years doesn't really bother people, the outperformance of equities over ~30 year periods *depends* on a fairly high ERP. If equity prices had been much higher, historically (or equity prices the same and bond yields higher), then equity would not have always outperformed over those ~30 year periods.

===

It's a bad book, but I enjoy bad books from the past, to see what people got wrong then (and how), and to some extent, to frame current thinking about the future. See also, for instance, "The Population Bomb".
And there were zero consequences for their poor predictions. Since they wrote that book, they continue to highly paid pundits by financial media were they can continue to do malice on unsophisticated investors.
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by bombcar »

You can have ERP in specific cases even when the "market" appears to have an ERP of zero, because everything is balancing out.

Often low value financial books will play a shell game where they seamlessly switch between specific stocks/companies and the market as a whole.

As a note of interest, the Dow closed above 36,000 on Nov 2, 2021, and is now above 44,000. So perhaps the ERP is now negative! :D

If ERP is the only reason stocks are worth more than bonds, and ERP went to zero, you'd expect them to price the same.

BUT - in that case, dividends would appear, because excess returns beyond cost of business + bonds would accrue to the shareholders.
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by exodusing »

nisiprius wrote: Tue Jan 28, 2025 8:25 amThe Extra Reward for Owning Stocks Over Bonds Has Disappeared
The equity risk premium, often defined as the gap between the S&P 500’s earnings yield and that of 10-year Treasurys, turned negative in late December for the first time since 2002 and sat last week at negative 0.15 percentage point.

The metric is based on a calculation of how much stocks yield, which is derived by dividing the stock market’s expected earnings by its price. The earnings yield is then compared with the yield on government debt.
The difference between stock and bond earnings yields shows how much investors are compensated for the additional risk of owning stocks over relatively risk-free government bonds....
In other words, in 2010-2024 we got all of the equity risk premium we're ever going to get?
The definition I'm used to seeing is that the ERP is the excess return of stocks over a risk-free rate, typically short treasuries. As Investopedia puts it "Determining an equity risk premium is theoretical because there's no way to tell how well equities or the equity market will perform in the future." https://www.investopedia.com/terms/e/eq ... remium.asp

Comparing the earnings yield to 10-year Treasuries is closer to the so-called Fed Model. https://en.wikipedia.org/wiki/Fed_model It's an equity valuation model. Flaws include that what you really want is forward earnings (which are of course unknown) and that earnings tend to increase with inflation, while 10-year Treasuries are nominal bonds.

The notion that stocks are risk-free over any time horizon (including 30 years) is ridiculous, although that does not stop many people from asserting it. https://en.wikipedia.org/wiki/Diversifi ... sification (citing an old friend of BH).
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by lazyday »

nisiprius wrote: Tue Jan 28, 2025 8:25 amWall Street Journal, in an article by Hannah Erin Lang on 1/27/2025 says
The Extra Reward for Owning Stocks Over Bonds Has Disappeared
The equity risk premium, often defined as the gap between the S&P 500’s earnings yield and that of 10-year Treasurys
....
Comparing earnings, which should rise with inflation given some time, to nominal Treasuries doesn’t make much sense to me. Shiller I think has subtracted TIPS real yield from CAEY (Cyclically Adjusted Earnings Yield, or 1/CAPE) to estimate the equity risk premium. Today this would probably predict a very small risk premium for US equities, assuming there’s no mean reversion of valuations.
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by dkturner »

nisiprius wrote: Tue Jan 28, 2025 8:25 am In other words, in 2010-2024 we got all of the equity risk premium we're ever going to get?
Maybe not forever but, if you follow the predictions of the likes of GMO and Vanguard, for at least the next 7-10 years.
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by HootingSloth »

I think it is mostly just a rehash of Irving Fischer's "permanently high plateau." At a sufficiently large time scale, you should observe a "one-time" large benefit from increasing valuations, followed by stock returns that roughly match bond returns (although with many messy variations and departures at shorter time scales).

It also seems to me that it is plausible enough that someone looking back at stock market return data 100 or 1000 or 10000 years from now will say that Fischer and Glassman and Hassett were all "right but early." It is one of the reasons that I personally do not take any actions based on valuations, as I don't have much insight into whether the average CAPE value over the actual long run will be 10 or 100 or something else.

If they end up being right but early, I don't think there is much reason to believe that 2024 is the "end" of this process, rather than somewhere near the middle or start. The quick toy-model conclusion from the WSJ requires, e.g., strong assumptions about the rate of future earnings growth driven by reinvested earnings that might be totally wrong.
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by KanCityKid »

HootingSloth wrote: Tue Jan 28, 2025 3:47 pm I think it is mostly just a rehash of Irving Fischer's "permanently high plateau." At a sufficiently large time scale, you should observe a "one-time" large benefit from increasing valuations, followed by stock returns that roughly match bond returns (although with many messy variations and departures at shorter time scales).
Like 1968-1981 when stocks returned 7.5% and 3-month T-bills returned roughly the same at 7.2%.
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by Walkure »

KanCityKid wrote: Tue Jan 28, 2025 4:01 pm
HootingSloth wrote: Tue Jan 28, 2025 3:47 pm I think it is mostly just a rehash of Irving Fischer's "permanently high plateau." At a sufficiently large time scale, you should observe a "one-time" large benefit from increasing valuations, followed by stock returns that roughly match bond returns (although with many messy variations and departures at shorter time scales).
Like 1968-1981 when stocks returned 7.5% and 3-month T-bills returned roughly the same at 7.2%.
Yes, I think this illustrates a key thing that the authors missed. A zero ERP doesn't mean no long-term risk, because the so-called "risk-free rate" is a convenient fiction. The fact is that bonds - especially long bonds - are also risky, and even more so in real terms. It's just that their risk tends to show up episodically in response to macro/fiscal/inflationary regime changes instead of continuous volatility like equities.

Also, I know at the time they wrote the Dow was more prominent vis-a-vis the S&P500 as a benchmark, but I still find it weird that anyone would project a specific target number for an index with a wacky price-weighted construction like the DJIA.
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by warner25 »

I've been making some form of this argument for a number of years. Here's a snippet of a thread from 2017, which also rolls US home prices into this idea...
warner25 wrote: Wed Aug 16, 2017 2:29 pm
AlohaJoe wrote: Wed Aug 16, 2017 1:48 amI sometimes wonder if the "housing bubble" might not be a bubble after all but simply the bidding up of an asset to drive down its future expected returns to bring It in line with other assets. That is, perhaps housing was underpriced for the past ~130 years and now it is "correctly" priced (or at least "more correctly priced").
... just like stock prices have been historically "high" for two decades, but that's potentially explained by proliferation of the 401k and publications touting the large equity risk premium that existed at least until the 1990s.
And more recently...
warner25 wrote: Sun Jul 23, 2023 10:15 pm
SimpleGift wrote: Sat Jul 22, 2023 12:30 pm It’s interesting to note that much of the historical stock and bond returns data that we rely on and take for granted in planning our portfolios today didn’t exist for most investors before the 1970s... One wonders if the confidence and courage provided to investors by all this market history have contributed to the increasing valuations of U.S. stocks in recent decades?
This is a great insight and question. From the beginning of my investor education 15 years ago, I've been fascinated by the seemingly permanent change to high valuations for US stocks.

Last year I wrote:
warner25 wrote: Fri Nov 25, 2022 10:22 am...Once everyone knows that a higher allocation to equities is near-certain to produce a better long-term outcome, and is thus "safer" or "less risky" in some sense, and advises everyone else of this near-certainty, then it may no longer hold true going forward.

I think that one problem with long-term equity returns data and back-testing is that it includes many decades when the average person didn't hold equities, and institutions held lots of bonds on their behalf. Looking at a Shiller PE chart, it appears to me that maybe equities were just under-priced between 1880 (when the data starts) and the 1980s. Incidentally, 1980s gave us the 401k plan, followed by the Roth IRA in the 1990s, and there was a proliferation of research and literature about how individuals should invest their savings, and equity valuations shot upwards and have remained relatively high ever since. So pick almost any starting point prior to the 1980s, and almost any end point since then, and equities look fantastic. But for anyone starting in the 1990s or later? It's really not obvious to me that equities will be such a great deal.
I didn't realize that the long-term equity returns data itself was a product of the research in the modern era. I think this backs up my theory.
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by nisiprius »

HootingSloth wrote: Tue Jan 28, 2025 3:47 pm ...It also seems to me that it is plausible enough that someone looking back at stock market return data 100 or 1000 or 10000 years from now will say that ... Glassman and Hassett were all "right but early."
Nonsense.
A sensible target date for Dow 36,000 is early 2005, but it could be reached much earlier
is unequivocally and immutably wrong. Nothing that happens afterwards can change the historic fact that the DJIA closed 2005 at 10,546.66.
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by HootingSloth »

nisiprius wrote: Tue Jan 28, 2025 6:19 pm
HootingSloth wrote: Tue Jan 28, 2025 3:47 pm ...It also seems to me that it is plausible enough that someone looking back at stock market return data 100 or 1000 or 10000 years from now will say that ... Glassman and Hassett were all "right but early."
Nonsense.
A sensible target date for Dow 36,000 is early 2005, but it could be reached much earlier
is unequivocally and immutably wrong. Nothing that happens afterwards can change the historic fact that the DJIA closed 2005 at 10,546.66.
To be clear, the part where they (along with the elided Irving Fischer) plausibly could end up being right but early is that the large positive ERP of stocks may end up being an anomaly in the long run. Obviously, the 2005 prediction ain't gonna happen.
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by nisiprius »

Sorry, "they weren't wrong, just early" triggers me every time...
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by HootingSloth »

nisiprius wrote: Tue Jan 28, 2025 8:37 pm Sorry, "they weren't wrong, just early" triggers me every time...
I meant it somewhat tongue in cheek. Irving Fishcher may have been one of the greatest economists of the century, but if he ends up being 100 or more years "early," that's not exactly a winning prediction.

The observation that this is a plausible long run outcome suggests to me that I shouldn't be placing a thumb on the scale in favor of things like mean reversion, but I don't see it as helping to make any affirmative predictions about the short to medium run.
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by AlphaLess »

I can predict the price of a basket of stocks in 10 years IFF you provide me the following:
- price today (e.g., SP500 index level),
- CAPE today,
- earnings growth from today to 10 years,
- CAPE in 10 years.

Notice that I am cheating: knowing CAPE in 10 years is almost equivalent to knowing price in 10 years (with "E").

Since CAPE in 10 years could be anything (it could be 10, it could be 100), there is a large range for stock prices in 10 years.

On the treasury side: if treasury yields keep increasing, at some point, it is worth shifting allocation to treasuries.

E.g., you are 70 (stocks) - 30 (treasuries). If treasury yield increases, might make sense to go 60-40.
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by exodusing »

AlphaLess wrote: Tue Jan 28, 2025 8:57 pm I can predict the price of a basket of stocks in 10 years IFF you provide me the following:
- price today (e.g., SP500 index level),
- CAPE today,
- earnings growth from today to 10 years,
- CAPE in 10 years.

Notice that I am cheating: knowing CAPE in 10 years is almost equivalent to knowing price in 10 years (with "E").

Since CAPE in 10 years could be anything (it could be 10, it could be 100), there is a large range for stock prices in 10 years.

On the treasury side: if treasury yields keep increasing, at some point, it is worth shifting allocation to treasuries.

E.g., you are 70 (stocks) - 30 (treasuries). If treasury yield increases, might make sense to go 60-40.
You can do it with p/e and earnings, each in ten years. Much simpler. :mrgreen:
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by Valuethinker »

HootingSloth wrote: Tue Jan 28, 2025 8:45 pm
nisiprius wrote: Tue Jan 28, 2025 8:37 pm Sorry, "they weren't wrong, just early" triggers me every time...
I meant it somewhat tongue in cheek. Irving Fishcher may have been one of the greatest economists of the century, but if he ends up being 100 or more years "early," that's not exactly a winning prediction.

The observation that this is a plausible long run outcome suggests to me that I shouldn't be placing a thumb on the scale in favor of things like mean reversion, but I don't see it as helping to make any affirmative predictions about the short to medium run.
Fisher. He was hung out to dry by history for one bad comment, when his contributions to Financial Economics are things we use every day (the Fisher relationship between real and nominal returns).

Interest rates have been coming down since the Middle Ages. That seems clear. And so the returns of other financial assets should be expected to fall as well.

But. Hyman Minsky was totally vindicated by what happened in 2008-09. A long period of unusual macroeconomic and financial stability was followed by a blowup of the kind that we had not seen since 1929 (1873 before that). Note even the oil crises of the 1970s were that bad. We were just incredibly lucky that the US president gave free hand to very able subordinates, one of whom had an expertise in the Japanese bubble (Ben Bernanke and Hank Paulson). That there were people on the floor of the Congress who shared the sense of historic urgency - Rep Franks in particular (but on both sides of the Congress). And that there were people in international institutions and governments - and in particular a UK Chancellor of the Exchequer (Finance Minister) Alistair Darling who heard his civil servants when they said on a Thursday night "if we don't do something, there won't be money in the bank machines by Sunday morning". And who persuaded a Prime Minister who himself had long experience as Chancellor (Gordon Brown) to act. I say with only a modicum of exaggeration that one could hear the engines of the Spitfires and Hurricanes coughing into life, as the British state swung into action in a moment of extreme crisis.**

It's like the San Andreas Fault in California vs the Cascadia subduction. The one slips and slides, and thus you get periodic earthquakes-- some quite severe. The other does not, and so you get super-quakes and tsunami waves every few hundred years. In an amazing piece of scientific detective work, we now have the date of the last one (January xx, 1700). And all we know is another one will come along, presently. (The interesting question of the next earthquake like the one that levelled Memphis TN in the early 1800s, which is not at a plate boundary - I don't think we have a handle on that).

We may have lower volatility of returns in the short run. But the possibility of epic melt ups and crashes is not eliminated.

Financial market returns may be lower in the future. We shouldn't expect that volatilities will be reduced commensurately.

** Winston Churchill's statue stands in Parliament Square--walking stick and greatcoat, as if he is just striding back to Downing Street from a War Cabinet meeting. And it says to all who pass it, and particularly those in positions of authority "You too may have your moment. When history calls and you must answer it."
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by AlphaLess »

exodusing wrote: Wed Jan 29, 2025 4:20 am
AlphaLess wrote: Tue Jan 28, 2025 8:57 pm I can predict the price of a basket of stocks in 10 years IFF you provide me the following:
- price today (e.g., SP500 index level),
- CAPE today,
- earnings growth from today to 10 years,
- CAPE in 10 years.

Notice that I am cheating: knowing CAPE in 10 years is almost equivalent to knowing price in 10 years (with "E").

Since CAPE in 10 years could be anything (it could be 10, it could be 100), there is a large range for stock prices in 10 years.

On the treasury side: if treasury yields keep increasing, at some point, it is worth shifting allocation to treasuries.

E.g., you are 70 (stocks) - 30 (treasuries). If treasury yield increases, might make sense to go 60-40.
You can do it with p/e and earnings, each in ten years. Much simpler. :mrgreen:
Essentially, the same.

In both cases we are cheating by wanting to know the final P/E or CAPE. "P" in that is the price.

But my point is that prices in 10 years could be higher IF:
- earnings grow faster than expected, AND / OR,
- PE / CAPE is higher than today.

The market can stay irrational longer than you can stay solvent.
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by exodusing »

AlphaLess wrote: Sat Feb 01, 2025 8:00 pm
exodusing wrote: Wed Jan 29, 2025 4:20 am
You can do it with p/e and earnings, each in ten years. Much simpler. :mrgreen:
Essentially, the same.

In both cases we are cheating by wanting to know the final P/E or CAPE. "P" in that is the price.

But my point is that prices in 10 years could be higher IF:
- earnings grow faster than expected, AND / OR,
- PE / CAPE is higher than today.

The market can stay irrational longer than you can stay solvent.
Yes, except you don't need earnings to grow faster than expected for your first bullet point. For example, if earnings grow, albeit slower than expected, and p/e stays the same, prices will increase. You do need earnings, p/e or some combination to increase.
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by nedsaid »

Dow 36,000? Nisiprius, I mean this is so retro. I moved beyond that book so long ago, this is I mean like ancient history, sort of like when dinosaurs roamed the earth. I can hardly remember the year 2000 except than my computer didn't blow up when the clock rolled past 11:59 pm on December 31, 1999; the precise moment when we changed centuries. Hard to remember Y2K and that two digit year thingee. I was, I don't know maybe 39 years old when that happened. Unlike Jack Benny, I didn't stay at age 39, I am 65 1/2 years old now.

Obviously, I am having some fun with this. I would suggest starting another thread with a modern day example of a book that won't stand the test of time. Dow 36,000 has pretty well been debunked here in the past, perhaps we should cite a modern book making the same mistake. Boomers and Generation X will know what we are talking about but this is beyond the younger Millennials, the older ones might get it.

Referring to Dow 36,000 is sort of like citing 1960's TV programs, except for reruns younger folks wouldn't know what we are talking about. I mean, I watched highlights of the 1965 American Football League championship on YouTube last night, I got to watch a young Jack Kemp lead his team to the AFL title. Kind of weird, I was six years old when the game was played, I didn't start following professional football until 1972 when I was 13 years old. In a way, though 1965 is within my lifetime, it was sort of before my time. Year 2000 might be before some folks time. We are revealing our age when we reminisce about a mostly forgotten book, pretty much saying we are a bunch of old fuddy duddys.
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by nedsaid »

I was joking above but a serious point has been raised by the thread. In Nedsaid's world, valuation and investor sentiment matter and matter a lot. Or as Jack Bogle would say, stocks have both economic/business return and speculative return. After a long period of excessive investor enthusiasm and when markets are driven by speculation rather than economic/business fundamentals, markets can see years of subdued returns for years afterwards.

The Dow 36,000 book came out almost precisely at the peak of investor enthusiasm and sky-high valuations. Afterwards, the US Stock Market suffered two 50% down markets and didn't return to all time highs until 13-14 years later. The Equity Risk premium went dormant and it took that 13-14 year time period for it to reassert itself.
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by LatentStoic »

Side note for nedsaid, when Dow 36,000 came out, circa fall 1999, I was working in a megacorp department at the time, mostly populated with people with (purportedly, anyway) strong math and quant skills and aptitudes. Both hard and soft copies of the Atlantic magazine excerpt of the book were passed around, with a bit too much enthusiasm. I still had much to learn thereafter about investing (and, well, life), but at least I had the good sense to see the article's basic premise was hooey.
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by nedsaid »

LatentStoic wrote: Sun Feb 02, 2025 9:55 am Side note for nedsaid, when Dow 36,000 came out, circa fall 1999, I was working in a megacorp department at the time, mostly populated with people with (purportedly, anyway) strong math and quant skills and aptitudes. Both hard and soft copies of the Atlantic magazine excerpt of the book were passed around, with a bit too much enthusiasm. I still had much to learn thereafter about investing (and, well, life), but at least I had the good sense to see the article's basic premise was hooey.
Side note to the side note: Hooey can be carefully disguised within very clever math. It is amazing that quants can have very different opinions on what can seem to be very fundamental issues.
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by unwitting_gulag »

The equity risk premium may have dissipated over the past 25 years, but what about the equity volatility premium? That my equity index funds perform strongly over 30+ years, is nice to ponder. What if they struggle and oscillate wildly en route? Don't I deserve some kind of compensation, or premium, for that harrowing crest-to-trough variation?

Then there's the question of which equity risk premium. US large caps (Dow or S&P), perhaps. But what about small caps? What about ex-US? Even if those US large-caps are all premiumed-out, meaning that a one-time upward repricing has already occurred, what about other corners of the market?
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by Valuethinker »

nedsaid wrote: Sat Feb 01, 2025 8:54 pm Dow 36,000? Nisiprius, I mean this is so retro. I moved beyond that book so long ago, this is I mean like ancient history, sort of like when dinosaurs roamed the earth. I can hardly remember the year 2000 except than my computer didn't blow up when the clock rolled past 11:59 pm on December 31, 1999; the precise moment when we changed centuries. Hard to remember Y2K and that two digit year thingee. I was, I don't know maybe 39 years old when that happened. Unlike Jack Benny, I didn't stay at age 39, I am 65 1/2 years old now.

Obviously, I am having some fun with this. I would suggest starting another thread with a modern day example of a book that won't stand the test of time. Dow 36,000 has pretty well been debunked here in the past, perhaps we should cite a modern book making the same mistake. Boomers and Generation X will know what we are talking about but this is beyond the younger Millennials, the older ones might get it.

Referring to Dow 36,000 is sort of like citing 1960's TV programs, except for reruns younger folks wouldn't know what we are talking about. I mean, I watched highlights of the 1965 American Football League championship on YouTube last night, I got to watch a young Jack Kemp lead his team to the AFL title. Kind of weird, I was six years old when the game was played, I didn't start following professional football until 1972 when I was 13 years old. In a way, though 1965 is within my lifetime, it was sort of before my time. Year 2000 might be before some folks time. We are revealing our age when we reminisce about a mostly forgotten book, pretty much saying we are a bunch of old fuddy duddys.
Britain had a coal miner's strike in the early 70s. Secondary picketing was still allowed and following a pitched battle with police, the miners were able to stop the distribution of coal to powerplants.

The miners wanted 3 years of above inflation pay rises, at a time when inflation was over 20% pa (it might have reached 25%).

The country went on a 3 x 12 hour day working week. There were scheduled rotating power cuts. Oddly, productivity increased - none of the famous union agreement regulated "tea breaks". You had your 12 hours, and you got your work done. Even in wartime they hadn't been able to impose that.

There was, predictably, a baby boom 9 months later. The Mathematician Dr Hannah Fry (now of Cambridge University) has an Instagram piece about it (she is screamingly funny).

The stock market fell by over 80% in real terms during that period (the time of the 1973 October Crisis & oil embargo on USA & Netherlands for supporting Israel). It then recovered, doing something like 100% in the following 12 months (but that only restores 20% of the damage -- aka "the volatility drag").

So that's how one of the pivotal events in modern British economic history is remembered. As a time, when, oddly, people spent more time with their families, huddling by candlelight, listening to the wireless (radio), playing games. Or conceiving of one's little brother.

Later there was 1979 and the "Winter of Discontent" -- rubbish piled up in Leicester Square as the dustmen were on strike, even the grave diggers went on strike for a period. That guaranteed Margaret Thatcher a huge election victory against a hapless Labour government, and the beginnings of a sea change in British politics and labour relations. 1m unemployed then would turn into 3m unemployed at the peak of Thatcher's monetarist crusade against inflation.

So that one is remembered in a slightly hazy 1940-sort of way. Plucky Britain against the slavering union hordes. Perfidious Albion rises again!

9-11 was maybe the first "modern" event. The stock market was already in a bear market that had begun in Spring 2000. But this really kicked it down.

9-11 is the one I would like my children to "remember". If you worked in finance, that really felt like "the day the world changed". Although arguably September 2008 (Lehman) was more important.
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by Valuethinker »

unwitting_gulag wrote: Sun Feb 02, 2025 2:17 pm The equity risk premium may have dissipated over the past 25 years, but what about the equity volatility premium? That my equity index funds perform strongly over 30+ years, is nice to ponder. What if they struggle and oscillate wildly en route? Don't I deserve some kind of compensation, or premium, for that harrowing crest-to-trough variation?

Then there's the question of which equity risk premium. US large caps (Dow or S&P), perhaps. But what about small caps? What about ex-US? Even if those US large-caps are all premiumed-out, meaning that a one-time upward repricing has already occurred, what about other corners of the market?
Volatility is usually measured as 1 year standard deviation.

I would say it is an example of Equity Risk, rather than a separate premium per se.

As we saw after 2000, it's perfectly possible for different asset classes to diverge vastly in performance. The "value premium" reasserted itself in spades -- probably the greatest outperformance for such a long period that value has ever produced.
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by unwitting_gulag »

Valuethinker wrote: Mon Feb 03, 2025 8:03 am
unwitting_gulag wrote: Sun Feb 02, 2025 2:17 pm The equity risk premium may have dissipated over the past 25 years, but what about the equity volatility premium? That my equity index funds perform strongly over 30+ years, is nice to ponder. What if they struggle and oscillate wildly en route? Don't I deserve some kind of compensation, or premium, for that harrowing crest-to-trough variation?

Then there's the question of which equity risk premium. US large caps (Dow or S&P), perhaps. But what about small caps? What about ex-US? Even if those US large-caps are all premiumed-out, meaning that a one-time upward repricing has already occurred, what about other corners of the market?
Volatility is usually measured as 1 year standard deviation.

I would say it is an example of Equity Risk, rather than a separate premium per se.

As we saw after 2000, it's perfectly possible for different asset classes to diverge vastly in performance. The "value premium" reasserted itself in spades -- probably the greatest outperformance for such a long period that value has ever produced.
I'm sorry, but do you mean "value premium" or "volatility premium"? Because unless I'm pulling my statistics from the wrong heap, value underperformed growth, so far in the 21st century. Thus the well-justified derision over the various "factors", of which value is one of the top contenders.
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by nedsaid »

Valuethinker wrote: Mon Feb 03, 2025 8:01 am
nedsaid wrote: Sat Feb 01, 2025 8:54 pm Dow 36,000? Nisiprius, I mean this is so retro. I moved beyond that book so long ago, this is I mean like ancient history, sort of like when dinosaurs roamed the earth. I can hardly remember the year 2000 except than my computer didn't blow up when the clock rolled past 11:59 pm on December 31, 1999; the precise moment when we changed centuries. Hard to remember Y2K and that two digit year thingee. I was, I don't know maybe 39 years old when that happened. Unlike Jack Benny, I didn't stay at age 39, I am 65 1/2 years old now.

Obviously, I am having some fun with this. I would suggest starting another thread with a modern day example of a book that won't stand the test of time. Dow 36,000 has pretty well been debunked here in the past, perhaps we should cite a modern book making the same mistake. Boomers and Generation X will know what we are talking about but this is beyond the younger Millennials, the older ones might get it.

Referring to Dow 36,000 is sort of like citing 1960's TV programs, except for reruns younger folks wouldn't know what we are talking about. I mean, I watched highlights of the 1965 American Football League championship on YouTube last night, I got to watch a young Jack Kemp lead his team to the AFL title. Kind of weird, I was six years old when the game was played, I didn't start following professional football until 1972 when I was 13 years old. In a way, though 1965 is within my lifetime, it was sort of before my time. Year 2000 might be before some folks time. We are revealing our age when we reminisce about a mostly forgotten book, pretty much saying we are a bunch of old fuddy duddys.
Britain had a coal miner's strike in the early 70s. Secondary picketing was still allowed and following a pitched battle with police, the miners were able to stop the distribution of coal to powerplants.

The miners wanted 3 years of above inflation pay rises, at a time when inflation was over 20% pa (it might have reached 25%).

The country went on a 3 x 12 hour day working week. There were scheduled rotating power cuts. Oddly, productivity increased - none of the famous union agreement regulated "tea breaks". You had your 12 hours, and you got your work done. Even in wartime they hadn't been able to impose that.

There was, predictably, a baby boom 9 months later. The Mathematician Dr Hannah Fry (now of Cambridge University) has an Instagram piece about it (she is screamingly funny).

The stock market fell by over 80% in real terms during that period (the time of the 1973 October Crisis & oil embargo on USA & Netherlands for supporting Israel). It then recovered, doing something like 100% in the following 12 months (but that only restores 20% of the damage -- aka "the volatility drag").

So that's how one of the pivotal events in modern British economic history is remembered. As a time, when, oddly, people spent more time with their families, huddling by candlelight, listening to the wireless (radio), playing games. Or conceiving of one's little brother.

Later there was 1979 and the "Winter of Discontent" -- rubbish piled up in Leicester Square as the dustmen were on strike, even the grave diggers went on strike for a period. That guaranteed Margaret Thatcher a huge election victory against a hapless Labour government, and the beginnings of a sea change in British politics and labour relations. 1m unemployed then would turn into 3m unemployed at the peak of Thatcher's monetarist crusade against inflation.

So that one is remembered in a slightly hazy 1940-sort of way. Plucky Britain against the slavering union hordes. Perfidious Albion rises again!

9-11 was maybe the first "modern" event. The stock market was already in a bear market that had begun in Spring 2000. But this really kicked it down.

9-11 is the one I would like my children to "remember". If you worked in finance, that really felt like "the day the world changed". Although arguably September 2008 (Lehman) was more important.
Oh my Gosh. I kidded Nisiprius about referring to a book published in 1999 that the Gen Z and younger members of the Millennial generation won't know what he is referring to. Now Valuethinker comes around and discusses the 1970's. If Nisiprius was retro, Valuethinker is even more retro than that.

You are reminding me of my age as I remember the 1970's very well. Oh man, I kidded about remembering as far back as 2000, it was a punch in the gut to be reminded of the 1970's which wasn't the greatest of decades. But yes, Nedsaid is old enough to remember all of that. Jimmy Carter and the malaise speech, the cardigan sweater, being told to turn down our thermostats. I even remember Nixon, the Vietnam War, the Arab Oil Embargo, cars lined up at the gas stations, odd/even license plates, etc. Gosh I even remember when Daylight Savings Time was made permanent to save energy, "permanent" didn't last long.

Yes, there was a time before the smart phone, the internet, the personal computer, and even the copy machine. I remember the teacher using a mimeograph machine to make copies and writing things on a clear plastic sheet to display on an overhead projector. I even remember carbon paper and triplicate paper. Yes, the 1970's were far different than today. We did however have electricity and flush toilets despite what some younger Bogleheads might think. Where did the years go?
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by Valuethinker »

unwitting_gulag wrote: Mon Feb 03, 2025 7:19 pm
Valuethinker wrote: Mon Feb 03, 2025 8:03 am

Volatility is usually measured as 1 year standard deviation.

I would say it is an example of Equity Risk, rather than a separate premium per se.

As we saw after 2000, it's perfectly possible for different asset classes to diverge vastly in performance. The "value premium" reasserted itself in spades -- probably the greatest outperformance for such a long period that value has ever produced.
I'm sorry, but do you mean "value premium" or "volatility premium"? Because unless I'm pulling my statistics from the wrong heap, value underperformed growth, so far in the 21st century. Thus the well-justified derision over the various "factors", of which value is one of the top contenders.
It was a sort of golden 3-4 year period in the early 2000s, when Value staged its greatest outperformance of Growth ever (at least on backcast numbers).

That said, the PEs of the Tech Media Telecoms stocks in 2000 make the current "Mag 7" look diminutive (w the exception of Nvidia & Tesla).
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by Valuethinker »

nedsaid wrote: Mon Feb 03, 2025 8:08 pm

You are reminding me of my age as I remember the 1970's very well. Oh man, I kidded about remembering as far back as 2000, it was a punch in the gut to be reminded of the 1970's which wasn't the greatest of decades. But yes, Nedsaid is old enough to remember all of that. Jimmy Carter and the malaise speech, the cardigan sweater, being told to turn down our thermostats. I even remember Nixon, the Vietnam War, the Arab Oil Embargo, cars lined up at the gas stations, odd/even license plates, etc. Gosh I even remember when Daylight Savings Time was made permanent to save energy, "permanent" didn't last long.

Yes, there was a time before the smart phone, the internet, the personal computer, and even the copy machine. I remember the teacher using a mimeograph machine to make copies and writing things on a clear plastic sheet to display on an overhead projector. I even remember carbon paper and triplicate paper. Yes, the 1970's were far different than today. We did however have electricity and flush toilets despite what some younger Bogleheads might think. Where did the years go?
Payphones. Finding a payphone that worked. And that was not nickel-slotted, ie where someone had rigged it to take your dime or quarter, and then they could pull it out later. Or just vandalised.

So much of "The Rockford Files" -- perhaps the greatest 1970s TV serial (other than MASH) is dependent on phonecalls, missed phonecalls, payphones, answering machine (the famous opening line).

"We were the future once" - not sure what play that's a line from.
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by unwitting_gulag »

Valuethinker wrote: Tue Feb 04, 2025 3:37 am
nedsaid wrote: Mon Feb 03, 2025 8:08 pm ...Yes, there was a time before the smart phone, the internet, the personal computer, and even the copy machine. I remember the teacher using a mimeograph machine to make copies and writing things on a clear plastic sheet to display on an overhead projector. I even remember carbon paper and triplicate paper. Yes, the 1970's were far different than today. We did however have electricity and flush toilets despite what some younger Bogleheads might think. Where did the years go?
Payphones. Finding a payphone that worked. And that was not nickel-slotted, ie where someone had rigged it to take your dime or quarter, and then they could pull it out later. Or just vandalised.
Payphones were still around and ubiquitous in the 1990s. The great transformation over the past 30 years was all about software, internet and smartphones. So many other things stagnated, or advanced only incrementally. I mean for example lithium battery capacity... sure, it's higher now than 30 years ago, but the breakthrough was in the 20th century, and ensuing improvements were only incremental. One supposes that we the consequence of this in Mag-7 outperformance, and "tech" overall. "Tech" no longer means lasers, jet engines, high speed trains or nuclear power plants. That's all passé, 20th century stuff.

But looking deeper, even in the 1970s there were computers processing banking records and calculating financial strategy. They were mainframes, run by people in white lab coats. The average person wrote in cursive in longhand on paper, but computers were already running society in the background. To truly reach the pre-computer age, we have to go back another 20 years, to the early 1950s... and that's beyond living memory for all by the most venerable members here.

Throughout this spectrum of eras, one supposes that the riskiness of stocks hardly changed. 401Ks broadened demographic participation in the stock market, as of course did the index-fund. But have the fundamentals changed? And if they have, is the change really actionable?
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by saver7007 »

Maybe the ERP goes negative then? I think it's very bothersome that the ERP is disappearing because you lose the rational argument for taking risk with stocks, but there's no alternative source of 7% long-run real return to compete for those investment dollars. To some extent a low ERP makes irrational speculators out of all of us who are buying.
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by Valuethinker »

unwitting_gulag wrote: Tue Feb 04, 2025 2:43 pm
Valuethinker wrote: Tue Feb 04, 2025 3:37 am

Payphones. Finding a payphone that worked. And that was not nickel-slotted, ie where someone had rigged it to take your dime or quarter, and then they could pull it out later. Or just vandalised.
Payphones were still around and ubiquitous in the 1990s. The great transformation over the past 30 years was all about software, internet and smartphones. So many other things stagnated, or advanced only incrementally. I mean for example lithium battery capacity... sure, it's higher now than 30 years ago, but the breakthrough was in the 20th century, and ensuing improvements were only incremental. One supposes that we the consequence of this in Mag-7 outperformance, and "tech" overall. "Tech" no longer means lasers, jet engines, high speed trains or nuclear power plants. That's all passé, 20th century stuff.
The improvements in Lithium ion batteries were more on the cost & density side. The incremental effects of hitting "tipping points". Where we are on batteries v the early 1990s. The EV1 electric car v the Tesla.

Very much in the same vein, solar cells. The actual percentage efficiency has only been creeping up, I believe (from low teens to low 20s?). But the cost has dropped 99% (or more). The world is now installing, each year, more solar capacity than the total installed base of say 5 years ago?

A lot of what goes on in an economy is the cumulative effect of those sorts of changes. Shipping containers I think is one of the canonical examples. The reduction in global shipping costs v the early 1960s must be over 90%? Containerize & you save all that dock labour, & damage + theft. Then build larger cargo ships than every before.

Power stations was another. For coal fired you had a rapid scaling up post war until you got to the 1GW steam turbine built by Alis-Chalmers for Connecticut Edison aka "Big Al". Then the limits of that process were reached, and haven't really changed since the late 1960s. In the early 1990s you had the Combined Cycle Gas Turbine power station as introduced by GE as the 9F. That led to massive changes in power systems: from coal fired stations, nuclear, where production was scheduled many hours ahead, to nearly instantaneous response from gas fired stations which were built to run far fewer hours per annum, but to run very profitably.

High Speed trains. Britain cannot build one economically it seems. USA just can't built one, full stop. The rest of the world are building/ built really impressive systems. Countries like Spain and Italy as well as the obvious (China). So it's not about technological leaps in performance (although they are certainly faster than the original Shinkasen of Japan in the early 1960s) but about adoption - the spreading out of the new technology.
But looking deeper, even in the 1970s there were computers processing banking records and calculating financial strategy. They were mainframes, run by people in white lab coats. The average person wrote in cursive in longhand on paper, but computers were already running society in the background. To truly reach the pre-computer age, we have to go back another 20 years, to the early 1950s... and that's beyond living memory for all by the most venerable members here.
You'd be amazed how many paper-based processes underpinned that (I worked in IT in insurance at one time -- memories of vast COBOL programs...). I think the big adoption was in the early 1960s & then the IBM System 360 -- which was 1968?
Throughout this spectrum of eras, one supposes that the riskiness of stocks hardly changed. 401Ks broadened demographic participation in the stock market, as of course did the index-fund. But have the fundamentals changed? And if they have, is the change really actionable?
Agreed. The major change has been a speeding up of everything - stock trading in particular. Reaction to news events is now nearly instantaneous. Sources of liquidity in trading have completely changed. Turnover of portfolios has gone up. Nobody rings up their broker to give them a voice order any more.
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by JackoC »

AlphaLess wrote: Sat Feb 01, 2025 8:00 pm
exodusing wrote: Wed Jan 29, 2025 4:20 am
You can do it with p/e and earnings, each in ten years. Much simpler. :mrgreen:
Essentially, the same.

In both cases we are cheating by wanting to know the final P/E or CAPE. "P" in that is the price.

But my point is that prices in 10 years could be higher IF:
- earnings grow faster than expected, AND / OR,
- PE / CAPE is higher than today.

The market can stay irrational longer than you can stay solvent.
I agree but would just add prices could give a realized return much higher than expected return if either earnings grow faster than expected or the P/E rises. If the PE is constant and earnings happen to turn out as expected, the return would be E/P. That's a fundamental relationship. Which I'm guessing you know but a lot of posters have glommed onto the mistaken idea that PE v return is some data mining result but very noisy in past. No, it's a fundamental relationship but of course is always noisy when compared to *future realized* return, by definition for a 'risk asset'.

Now 1/CAPE for the S&P is around 2.6% and 10yr TIPS around 2.08%. That's quite narrow historically. Although it's narrowed a lot just since the bond bear market started in 2022. End of 2021 CAPE was similar but 10 TIPS was ca. -1%. And even if one quibbles with 1/CAPE as the E/P measure graphing any consistent 'earnings yield' measure over the last century+ v estimates of real expected bond yield puts the spread relatively quite narrow now, though again not especially narrow only 3 yrs ago. This situation doesn't fit well though with the explanation 'everybody's now read bullish investing books (and read a lot of bullish posts on BH forum :happy ) saying stock risk is just 'turbulence' so expected ERP is disappearing'. Why so much of it just in the last 3 yrs? Puzzling, but OTOH saying that's a mirage and expected ERP is really a constant is clearly wrong IMO. And if expected ERP isn't constant, no real theory would back up 'stay the course w/ constant stock % unless your personal situation changes'. STC fixed % could only be justified with widely varying expected ERP via 'behavioral finance', which IMO tends to just end up as people ignoring (actual) theory and doing whatever they want (though in the end of course they can), saying it's correct based on 'behavioral finance' (or a majority vote of likeminded people in a given discussion group).

Anyway 'what's supposed to happen' if the ERP disappears is stock expected return converges to the 'riskless' return. It doesn't mean the stock market has to blow up. Like now apparent low expected ERP isn't necessarily a 'crash predictor'. Theory would just say you need to have more tolerance for risk to *stay at the same stock %* when the expected ERP is narrow. And that the *market clearing* level of risk tolerance has probably increased. That is assuming the 'riskless' asset hasn't gotten further from riskless in reality (perhaps that could be argued as part of it) and expected market risk hasn't dropped a lot just in the last 3 yrs (I don't see any plausible argument it has).
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by Circle the Wagons »

JackoC wrote: Thu Feb 06, 2025 11:35 am And if expected ERP isn't constant, no real theory would back up 'stay the course w/ constant stock % unless your personal situation changes'. STC fixed % could only be justified with widely varying expected ERP via 'behavioral finance', which IMO tends to just end up as people ignoring (actual) theory and doing whatever they want (though in the end of course they can), saying it's correct based on 'behavioral finance' (or a majority vote of likeminded people in a given discussion group).
While I agree with this 100% and practice dynamic AA myself, I see another potential argument for static AA beyond "behavioral": many believe there are too many squishy assumptions required to effectively act on shifts in the ERP, and perhaps they believe they're just as likely to harm as help their portfolio performance.
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by exodusing »

Circle the Wagons wrote: Thu Feb 06, 2025 1:28 pm
JackoC wrote: Thu Feb 06, 2025 11:35 am And if expected ERP isn't constant, no real theory would back up 'stay the course w/ constant stock % unless your personal situation changes'. STC fixed % could only be justified with widely varying expected ERP via 'behavioral finance', which IMO tends to just end up as people ignoring (actual) theory and doing whatever they want (though in the end of course they can), saying it's correct based on 'behavioral finance' (or a majority vote of likeminded people in a given discussion group).
While I agree with this 100% and practice dynamic AA myself, I see another potential argument for static AA beyond "behavioral": many believe there are too many squishy assumptions required to effectively act on shifts in the ERP, and perhaps they believe they're just as likely to harm as help their portfolio performance.
Yes. Consider Bill Sharpe's recommendation, discussed in this thread viewtopic.php?t=207804. Basically, let your allocation vary in proportion to market movements.
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by JackoC »

Circle the Wagons wrote: Thu Feb 06, 2025 1:28 pm
JackoC wrote: Thu Feb 06, 2025 11:35 am And if expected ERP isn't constant, no real theory would back up 'stay the course w/ constant stock % unless your personal situation changes'. STC fixed % could only be justified with widely varying expected ERP via 'behavioral finance', which IMO tends to just end up as people ignoring (actual) theory and doing whatever they want (though in the end of course they can), saying it's correct based on 'behavioral finance' (or a majority vote of likeminded people in a given discussion group).
While I agree with this 100% and practice dynamic AA myself, I see another potential argument for static AA beyond "behavioral": many believe there are too many squishy assumptions required to effectively act on shifts in the ERP, and perhaps they believe they're just as likely to harm as help their portfolio performance.
But that might kind of merge with 'behavioral finance', at least the last part. Also ERP measured at 4% vs. 3.5% is one thing. The recent move (extending Ilmanen's graph, below, from 2017 3.% to 2021 is was>4% when he wrote 'Investing Amid Low Expected Return', now 1-some%) would seem another. Note the graph uses a slightly different measure of earnings yield which comes out higher now than just 1/CAPE but the basic point is comparison over time of theoretically reasonable measures, not finding the provably perfect measures at a given time. It's not squishy IMO that something has changed lately. Nor just rarified ivory tower, in everyday terms TIPS provide a much more competitive return now v stock where the market gives no evidence expected return has changed. Even if one believes stock expected return is always 6% real (because that's what it was starting from lower valuations than now) the margin has still compressed. Why should that make no difference? 'Behavioral finance' (though you can probably tell I'm not its biggest fan) is IMO a relatively better reason than 'too many assumptions' to ignore this at a relative extreme like now. Just not necessarily an absolutely good reason.

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Circle the Wagons
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Re: "Dow 36,000" was predicated on [Equity Risk Premium] disappearing. What was supposed to happen then?

Post by Circle the Wagons »

JackoC wrote: Thu Feb 06, 2025 2:16 pm
Circle the Wagons wrote: Thu Feb 06, 2025 1:28 pm

While I agree with this 100% and practice dynamic AA myself, I see another potential argument for static AA beyond "behavioral": many believe there are too many squishy assumptions required to effectively act on shifts in the ERP, and perhaps they believe they're just as likely to harm as help their portfolio performance.
But that might kind of merge with 'behavioral finance', at least the last part. Also ERP measured at 4% vs. 3.5% is one thing. The recent move (extending Ilmanen's graph, below, from 2017 3.% to 2021 is was>4% when he wrote 'Investing Amid Low Expected Return', now 1-some%) would seem another. Note the graph uses a slightly different measure of earnings yield which comes out higher now than just 1/CAPE but the basic point is comparison over time of theoretically reasonable measures, not finding the provably perfect measures at a given time. It's not squishy IMO that something has changed lately. Nor just rarified ivory tower, in everyday terms TIPS provide a much more competitive return now v stock where the market gives no evidence expected return has changed. Even if one believes stock expected return is always 6% real (because that's what it was starting from lower valuations than now) the margin has still compressed. Why should that make no difference? 'Behavioral finance' (though you can probably tell I'm not its biggest fan) is IMO a relatively better reason than 'too many assumptions' to ignore this at a relative extreme like now. Just not necessarily an absolutely good reason.

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Preaching to the choir. My own conclusion is that the evidence is too compelling that, over the long-term, "time diversification" improves risk-adjusted outcomes, and imperfect is still helpful.

But I think it's a reasonable position if an investor seeks substantial evidence and comfort before relying on ERP and volatility forecasts to change their AA.
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