From: Timothy Bates (tbates@karri.bhs.mq.edu.au)
Date: Mon Sep 27 1999 - 01:38:40 MDT
on 9/27/99 2:46 PM, hal@finney.org wrote:
> A very interesting article is available online from Atlantic Monthly
> at http://www.theAtlantic.com/atlantic/issues/current/9909dow.htm.
> (The article is in three parts, and the 2nd and 3rd parts are the more
> informative sections.)
>
> The authors analyze stock market prices using basic techniques of
> expected income stream and also risk premiums, and conclude that
> stocks are actually extremely UNDERvalued today (and always have been).
> By their model the Dow ought to be running at 36,000 or even more.
You need to look at the series of follow ups in the Economist. This guy's
figure's are just wrong. That doesn't mean the Dow won't go to 36k or even
100k, but that his analysis is fundamentally flawed.
The reason for this is that is argument relies on very high leverage from
future returns. Even minuscule variations in estimated long-run returns
(from, say, 8% to 8.2%) can halve or triple the "predicted" current Dow.
Within the margin of error, stocks are where they should be if (as this
author assumes) the long-term returns are going to stay stable at historical
long-term levels.
Two more logical claims for high Dow numbers are Dent (who uses demographic
swings to justify his prediction) and the wired perspective. Dent has
already raised his prediction from a massive 10k (predicted when the Dow was
at less than half this amount), to high 30s. This renders his arguments
rather suspect: it suggests that we are already well past the
demographically justified Dow level (lots of educated working people and few
children and old-people --> high Dow). The Wired perspective is essentially
that we are approaching the singularity and wealth is going to increase
exponentially simply because of this. TO my mind, this last is the most
reasonable, but it suffers from too much rationalism, and overlooks theft,
coercion, rebellion, etc. In other words, it thinks of us all as being
reasonable instead of many of us being like Sadam Hussain. there is no law
of nature that protects our individual freedom, and if this goes under, so
too does the exponential wealth increase.
tim
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