Dow 36,000 Is Back


In a testament to just how euphoric stock markets are right now, James K. Glassman the co-author of the fabled Dow 36,000 — a book published in 1999 that claimed that stock prices could hit 36,000 by as soon as  2002 (and which quite understandably is now available for just 1 cent per copy) — has written a new column for Bloomberg View claiming that he might have been right all along:

When we wrote our book, we expected that the stock market, as represented by the 30 blue chips of the Dow, would rise to 36,000 for two reasons.

First, investors had mistakenly judged the risk in stocks to be greater than it really was. Here, we drew from the work of Jeremy Siegel of the Wharton School of the University of Pennsylvania. He showed that, over long periods, stocks were no more volatile, or risky, than bonds.

We saw indications that the risk aversion of investors was declining — as we believed it should. Lower perceived risk would mean higher stock valuation measures: rising price-to- earnings ratios, for instance.

Second, we assumed that real U.S. gross domestic product, the main driver of corporate profit growth, would rise at 2.5 percent a year — a bit below the historic post-World War II rate, but still a decent clip. We warned, however, that small changes in growth rates could have big effects on stock prices.

What’s happened since 1999?

First, investors have become more frightened of stocks, not less — as reflected in a higher equity risk premium, the excess return that investors demand from stocks over bonds.

These fears may be perfectly reasonable. We wrote our book before the Sept. 11 attacks, the dot-com debacle, the 38 percent decline in stocks in 2008, the “flash crash” of 2010 that sent the Dow down 1,000 points in minutes, the Japanese tsunami and the euro crisis. There’s a good case to be made that, because of the instant interconnections wrought by new technology, unprecedented “black swan” events are increasing and markets are becoming more volatile as a result.

The heightened fears of investors are reflected in lower valuations. Currently, for example, the forward P/E ratio (based on estimated earnings for the next 12 months) of the Standard & Poor’s 500 Index is about 14. In other words, the earnings yield for a stock investment averages 7 percent (1/14), but the yield on a 10-year Treasury bond is only 1.9 percent — a huge gap. Judging from history, you would have to conclude that bonds are vastly overpriced, that stocks are exceptionally cheap or that investors are scared to death for a good reason. Maybe all three.

Explaining why Glassman and Hassett were wrong is simple. They believed that they had found a fundamental truth about how stocks should be valued — that stocks were really less risky than the market perceived them to be — and that the market would correct to meet their beliefs. The problem is that there is no fundamental truth about what stocks are worth. The fundamentals of a company are determined by profit and loss, but the market prices of stocks are created from the meeting of different parties with different subjective beliefs. A buyer of a stock at $10 might believe it will become worth $100, and the seller might believe it is really worth $5. The future performance of that stock will be determined by the future beliefs of market participants in light of the future performance of the firm. Market participants have for some reason always valued equities as a class within a certain P/E range:


With one exception — the peak during which Dow 36,000 was written — equities have traded roughly between 5 and 30 times earnings. That’s a large range.  Glassman and Hassett believed — and subsequently tried to convince markets — that they were pricing equities wrong, and that stocks should be priced at roughly 100 times earnings.  They failed. Markets just wouldn’t go there.

One significant issue with such predictions is that there are far too many unknown variables. They didn’t know future technology or energy trends. They didn’t know future geopolitical trends. They didn’t know future social or demographic trends. They didn’t know the shape or style of future financial markets. All of these trends are critical in determining market sentiment, and the financial, economic and material fundamentals that drive earnings. It was all a big extrapolation with a catchy-sounding number that they effectively pulled out of the air and dressed up in the false clothes of economic rigour. And the real economy — as Glassman candidly admits — just didn’t match up to their assumptions.

Glassman thinks that Dow 36,000 is attainable with a return to strong growth:

Let’s set investor fears aside for a moment. For investment gains over the long term, there is absolutely no substitute for faster economic growth.

To get it, we need policy changes that will create a better environment for businesses to increase revenue, profits and jobs: a rational tax system that keeps rates low and eliminates special deductions and credits; immigration laws that encourage the best and the brightest to move here and stay; entitlement reform to bring down costs and provide incentives for productive seniors to keep working; sensible environmental, workplace and financial regulation that allows entrepreneurship to thrive; a K-12 education system that boosts student achievement and holds teachers, administrators and politicians accountable …

Chime in and make your own list, because it’s time to focus on what counts in an economy: growth. Even with relatively high risk aversion (let’s say, what we have now), faster growth would significantly increase stock prices.

How fast can the U.S. grow? Four percent is attainable, but I’d settle for 3 percent. Get there quickly, and we’ll get to Dow 36,000 quickly, too.

Back in the real world, we have the opposite problem. Stocks are soaring, on the back of a very weak economy. In fact, the fact that Glassman is being given a platform again to talk about the possibility of huge future stock gains is probably testament to just how overvalued stocks are. The market has more than doubled since the trough in 2009 on the back of the idea that Bernanke will do whatever it takes. But that illusion could easily be shattered, because there are many kinds of negative shocks that central bankers cannot prevent or control. To justify present valuations in the next two years, we would need a significant uptick in American and probably also global growth. Instead we have what may be the biggest housing bubble in history, declining global growth, North Korean threats to start a nuclear war, and so on. And all the while the market is setting new nominal highs.

The uber-optimistic atmosphere permeating much of the financial press is frightening to me. The resurrection of the Dow 36,000 zombie is a symbolically significant event that likely signals much the same thing as it did first time around: a correction.

32 thoughts on “Dow 36,000 Is Back

  1. Pingback: Dow 36,000 Is Back | Fifth Estate

  2. Retail investors look at price graphs that rarely go back further than 5 years, so it is quite easy for brokers and spruickers to reinforce their sales pitch with a emotionally positive picture. That is why parabolic feed back loops occur in bubbles.

    • Its like lose money and make it up in volume… Informational market pricing….
      I control 10,000 shares of a trending stock at $50.00. By the end of the week the buying trend increases and the price rises. This trend continues for several weeks… raising the price to $52.50.. Over the next few months trend continues while I sell 4,999 shares at average of $53.00. Price quickly shakes out to $50.00… over the next several weeks I sell the remaining 5,001 shares at and average of $49.00. Trend is over and stock is again priced at $50.00. I just lost money on over half of my sales but still turned a profit while the real worth of the stock never changed. Without real economic growth pricing is just an illusion that is manipulated everyday.

  3. I don’t find Dow 36000 unreasonable, or even Dow 100000. All that is necessary is to create enough funny money and give it to rich people. They will bid up the price of the things they like to buy: stocks, bonds, collectibles, high-end real estate, precious metals, and politicians — until the funny money runs out. Then they will demand more. If they don’t get more they will get depressed and we will have a depression.

    In the early Naughties, it was pretty obvious that most of the funny money was produced by expanding credit and applying it to real estate and real estate-derived instruments, so one could guess that the exit path from the bubble would likely be marked by real estate crashing, credit disappearing and the financial system seizing up. I am not sure what’s going on now. As the system becomes more fictional it gets harder to figure out.

    • Precisely. In the late 90’s before Austalan banks lowered credit standards and securitised mortgages, a flat within 5km of Melbourne CBD was selling for 90,000. That same flat at the peak 2006,was selling for 500000. Who bought it at 90,000. The people who had equity and could meet the NEW lending standards that was funded by securitisation money. So I would agree the printing and distribution through connected channels has shifted wealth to the elite. One on minimum wage can not buy a humble 60’s built one bedroom flat in an area close enough to amenities and facilities anymore.

      I think there needs to be a taxation on assets that are surplus to one’s needs. I think it is a disgrace that a minority of seniors have obscene wealth to retire on or pass on to their princelings, while people on minimum wages struggle to raise a family or worse, never have the experience of a family due to financial pressures.

      I am glad Hollywood and the MSM has made being single and childless cool, because if people valued a family over consumeristic individualist societies, the rich would be in trouble.

  4. If you were going to be a major investor in a company, it would seem reasonable that you would preform your due diligence and make decisions based on REAL financial information.

    The stock market is simply a rigged casino [as everybody should understand at this point] that operates with the assumption that you invest based on whether you believe the stock price is going to go up for almost every reason except the fundamentals.

    Even though anybody with an IQ over 35 understands this, still, the brightest among us [the 1%] have an enormous amount of their wealth in stocks. This should be a cautionary tale to the rest, giving us an idea of why so many people got wiped-out in the 1930’s depression.

    It is this type of social behavior that leads to ever increasing dys-function in all of our institutions, causing doctors, lawyers, accountants, teachers, etc., to switch their allegiance from their charges to their sponsors.

    The Elite do many, many interesting things, but none more impressive than how they trap the professional class in a convoluted web of financial dependency that always manifests itself in self-destructive behaviors.

  5. Well, there is where the inflation goes – the Stock market . The bubble’s been blown bigger and bigger. Better wait for it pop now. May take years but worth to wait for. Like MaxKeiser said that the stock market grind to all time high by the stairs but when it comes it’ll be by the elevator shooting straight down.

    – “A buyer of a stock at $10 might believe it will become worth $100, and the seller might believe it is really worth $5. ” –

    Very true! All about the pricing. A plain horse can sell a lot of money when there are no better and limited supplies. One will sell to the highest needy bidders with the money.

    No need to write a dam book about that because it’s not that complicated to know why the US stock market keeps going up. Some of the reasons pick up from the streets are as below:

    1) During the crush everyone who wanted to get out to stock had already done so. Those who have been holding stocks have enough money to hold on them no need to sale.

    2) Corporations are not issuing new stocks.

    3) Companies stocks buying back with the money they made buy cutting corners + the free money they can borrow money at no cost.

    4) And since Ben Bernan keep printing free money there are all the reason that there are more buyers/speculators than sellers.

    5) Currency war: People and rich foreigners want to get out of their own devalued currencies going into the US dollar and the Us stock market – cleanest of the dirty shirt.

    6) The main players are the big sharks themselves.

    7) The market is manipulated and monopolized by the central bank and the same numbers of big companies. There are no much competitions and they can price whatever whenever they like.

    Finally, feeling really down not followed Obama’s tip years ago after the crush “It’s time to buy stock.” Instead, had been reading watching too much all that negative stuff over the years since the crush. Therefore had missed so many opportunities time after time. Now what can be done but only to wait it out watching other’s making good money?

    So many “smart” negative noises out there are all sounds of the squashed sour grapes.

    • One should read or watch news and financial sources that the vast majority is doing as well. Journalists always look for reasons to explain market moves, and this can rei force a trend.

      One can disagree with Federal Reserve policy, but the winners over the past 4 years have been positive optimistic ones who realise that the Fed is engaging in a ideological experiment. They bought in early and saw stocks as a hard asset. A monopolistic or cartel business that would be the recipient of increased credit fuelled demand, with subsequent higher profits, and higher demand for their stock fuelled by easier access to leveraged investment.

      I now undrstand we have a Socialist system now which surprises me as I was brainwashed by a diet of Hollywood movies about the USA being the land of the FREE AND BRAVE. but now I am wiser. You can’t fight the Fed or Government. Free markets are dead. Regulatory capture is a fact.

      I am waiting for the next crash to buy in on the newly announced panacea from TPTB.

      • You are right. I had started to pay attention to economy after the 2009 crush. Before that I knew not a thing about anything. I’m learning. I admit got sucked in by the like of ZeroHedge which is all negative-nothing-can- be-done type. Hell I have been afraid to do anything because of the confusion conflicting messages from all sorts of media, smoke everywhere. But may be it’s a good thing not to act when one doesn’t know what to believe or not to believe. Better sitting on cash than to feel sorry and lost all the hard earned money losing sleep at night. Me too, am waiting.

        Here is the wisdom from the book “Where’s the customers’ Yachts?”

        “When there is a boom and everyone is scrambling for common stocks, take all your stocks and sell them. Put the proceeds in the bank [T-bills]. No doubt, the stocks you sold will go higher. Pay no attention to this—just wait for the recession which will come sooner or later. When it gets bad enough to arouse the politicians to make speeches, take your money out of the bank [T-bills] and buy back the stocks. No doubt the stocks will go still lower. Again pay no attention. Wait for the next boom. Continue to repeat this operation as long as you live, and you’ll have the pleasure of dying rich.” –Fred Schwed, Jr., (1940) Where Are the Customers’ Yachts?

        (this book had written in the late 30s or early 40s during the depression. believe)

        • wise advice. For 25 years I have devoted my life to understanding the markets and geopolitics. I can’t work out the timing events because I am not an insider to the criminal cabal. I will just wait for major headlines to quietly accumulate monopolistic businesses. Gold will be out of favour soon.

          Zero Hedge makes money as an infotainment bureau. Whilst many arguments I agree with, it does not have the influence to move markets. Retail investors only notice that the Dow has beaten previous highs on their nightly news. They’ll pile in now, and parabolic heights will be reached. When it drops, the few that lose by buying at the top will be too small a lobby group for Politicians to worry about. Akin to gamblers losing all at the casino. The Welfare Bureau’s problem.

        • see William Banzai’s “bubblenomics” piece. I bought the original. His art is prescient and will be worth more than Warhol in the future.

      • “I now understand we have a Socialist system now which surprises me as I was brainwashed by a diet of Hollywood movies about the USA being the land of the FREE AND BRAVE. but now I am wiser. You can’t fight the Fed or Government. Free markets are dead. Regulatory capture is a fact.”

        BR, if you have a government, by definition, you have a socialist system. All these things [government, markets, regulatory agencies, etc.] have always been, on a scale of 1 – 100, somewhere in the middle.

        Perhaps for you and I, as professional people, we see a great decrease in our own freedoms, but I would bet that if you interviewed 100 people, you would get 100 different perspectives. Although what’s going on now truly sucks [BIG TIME], it’s not like we could give this era a 5 and the 1960’s a 95.

        I keep attempting to point out that what is going on now has ALWAYS been going on, especially if you happen to be a minority in most countries. Even in the land of the free and the home of the brave, this [quazi-ideal] really only applied [for the first 175 years of there-abouts] if you were a while male.

        So, although this system is under-going massive transformation, this is normal and things will improve with time [after bottoming]. This is the history of our species. It is in the interests of TPTB to have a functioning system, after all.

    • “Bubble Economy” Bernanke says its not real money until someone uses it. Rather than having it sitting around collecting dust, the stock markets launders it and gives it to the rich… another new welfare programm

  6. “Let’s set investor fears aside for a moment.”

    While we are at it, let’s give everyone a pony. I mean, the stipulation here is “reality doesn’t matter”

  7. We are living in the age of Bubble Economy Era. The problem is not bubbles. It’s about how to artfully manage manipulate the bubbles – how to keeping the right amount of air in, right period of time, when to let just the right amount air out and when to refill the right amount of air back in etc etc….

    Pretty color balloons need just the right amount of air to blow and fly high. The Champagne for celebrations or Beer for football games will not taste good without the air bubbles.

    Seems China had managed their bubbles nicely so far. They never pop the bubble all the way. They just let some air out before the bubble burst and keep the bubble flowing in the air for as long as needed.

    Most of the medication are made of poisonous sustenance. The keys is how to combine them and how to dose them and when to use them.

    The above are not pro bubble. Just some thought about bubbles

      • Well actually the Chinese leaders just have too much power to get things done the way the think it’s right for them. Wise or not wise they are street smart and quick learners without too much common sense but that may change quickly. And one day they too, will crush and burn in a most painful way. Their time will come.

        recommending a very sensible voice Miss Denial park:

        How did unlimited QE juice markets? Denial Park

    • The problem with bubbles is that they are a surface phenomenon of human group psychology and are thus largely unpredictable. Great leaders can try to manipulate the pressure within, but sooner or later they will miscalculate and the bubble will pop. The longer the period before the bubble pops, and the more volatility (energy) embedded in the inflation, the more severe the pop will be and the more serious the social consequences of the resulting crash. The next one should be a doozy.

      • “trouble with bubbles”

        That’s the second law of thermodynamics… There are always more disordered states than ordered states (chaos). The more energy that is used to create order only increases the hot air and produces more chaos….

    • “Chinese and the bubble”

      A wise man once said… “Big swings are followed by more big swings”

      Hold onto your hat….

  8. This Dow chart can catapult off the charts at 500,000, but know this; an unsound economy
    crippled by high unemployment and no true jobs growth producing salaried consumers
    in large numbers will never recover and the markets are bound to reflect that sooner or
    later. Those who don’t learn from history repeat history over and over again!

    Chicago, Illinois

    • Human nature does not change, so it’s a matter of setting up simple systems whereby you give the individual the most control possible over his/her life as is possible. This would be the ideal.

      As systems become larger/more complex, the people who control/manage these systems use their own natural self-interest to manipulate the system. This also seems to be human nature and is why these larger systems always break-down due to corruption.

      If people keep embracing large systems, they will indeed re-live the same massive dys-function that defines these complex systems time and again.

      What was amazing about the post WWll era in the United States was the confluence of factors that gave rise to an incredible level of wealth for a great percentage of the population. As these factors made their way back to baseline, this illusion [that this could continue] slowly but surely disappeared, unfortunately dropping below historical norms [labor’s share of income].

  9. Pingback: Stocks Priced in Real GDP | azizonomics

  10. Pingback: The Magazine Cover Top? | azizonomics

  11. Whats up this is somewhat of off topic but I was wondering if blogs use WYSIWYG editors or if you have to manually code with HTML. I’m starting a blog soon but have no coding skills so I wanted to get advice from someone with experience. Any help would be greatly appreciated!

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