Mankiw on indexing

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Mankiw on indexing

Postby grok87 » Tue May 21, 2013 9:44 pm ... .html?_r=0
Nice article in the Sunday NY times on indexing by Mankiw.
He refers to some interesting research by Shiller from 1981 ... 2314371727
Do Stock prices move too much to be justified by subsquent changes in dividends.
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Re: Mankiw on indexing

Postby Valuethinker » Wed May 22, 2013 6:33 am

SHiller made his name on that latter piece and I think it is still hotly debated. I think broadly the likely answer is 'yes' (ie too volatile to be justified by fundamentals).

Complicating factor as we saw this crisis is the level and performance of the stock market directly drives the ability of the financial stocks to pay dividends, thus a positive feedback loop (both up and down) which is not self correcting. Similar for the Real Estate sector.

Also for the home finance and home construction sector. The housing bubble drove those stocks. Just as during the dot com bubble, the stocks of HP, IBM, Cisco, Sun, Intel, Verizon etc were driven up by inflated demand for tech hardware, software and services. So when the stock prices fell, so did the markets for their kit, thus lowering earnings, and 'torpedo stock' lowering PEs as well-- so double whammy down.

These built in positive feedback loops between the financial markets and the companies listed on them increases their instability. Just as the Loan-to-Value lending metric for Commercial RE increases the bubble-bust behaviour of that sector-- ie causing increased leverage at the top, and reducing leverage at the bottom.

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Re: Mankiw on indexing

Postby LadyGeek » Sun May 26, 2013 9:23 pm

There's a later thread linking back to this same article, but is discussing aspects regarding the Vanguard fund mentioned in the last paragraph: Mankiw suggests Vanguard Total World Stock ETF
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