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December 06, 2004

And Today's Winners of the Mendacity Sweepstakes Are...

The authors of Dow 36000: The New Strategy for Profiting from the Coming Rise in the Stock Market pretend, once again, that their book did not say what it said:

TCS: Tech Central Station - DOW 36,000: Five years ago, economist Kevin Hassett and I wrote a book called Dow 36,000.* Maybe you have heard of it. The book made the bestseller lists and won accolades from, among others, the current chairman of the president's Council of Economic Advisors. For some, however, the book became an object of derision because -- just in case you haven't noticed -- the Dow hasn't actually risen to 36,000 yet.... Dow 36,000 was not a prognostication. Sure, the Dow will hit 36,000 and probably, eventually, 360,000. But I don't know exactly when, and I don't believe investing is a game of forecasting what's going to happen tomorrow or next year...

However, those of us unlucky enough to own Dow 36000: The New Strategy for Profiting from the Coming Rise in the Stock Market can go to our bookshelves, pull it down, and read that "the Dow should rise to 36000 immediately"--i.e., in October, 1999. But Hassett and Glassman say, they are going to be cautious and conservative. They are not going to forecast that the Dow will rise to 36000 tomorrow, but instead they "believe the rise will take some time, perhaps three to five years..." (p. 18).

However, they acknowledge that they might be wrong: the rise might come much quicker. As they go on to say later on the book, the fact that Glassman and Hassett "conservatively" don't expect the rise of the Dow to 36000 to occur for three to five years--i.e., until 2002 or 2004--does not mean that investors should delay. Investors should "seize the opportunity now [i.e., in 1999] to profit from the rise in the Dow to 36000 (p. 125)."

On pages 18 and 19 of the book they go so far as to sneer at one of their American Enterprise Institute colleagues--someone who told them back in 1998 what Glassman is saying now. For when one AEI colleague heard their title, he gave a cynical laugh and said, "As long as you don't say when [the Dow will reach 36000], I suppose it is all right." Glassman and Hassett's response was: "we aren't laughing. The case is compelling.... 36000 is a fair value for the Dow today... stocks should rise to such heights very quickly. As you read on, you will... learn to invest in ways that take advantage of a remarkable time in financial history..."

Glassman's investment advice today is good. He is right when he writes that "stocks are a far better place than bonds and cash to put the vast majority of your money for the long run." But his flat-out claim that this "was the unequivocal message of [Dow 36000: The New Strategy for Profiting from the Coming Rise in the Stock Market]" is flat-out false. That "stocks are a far better place than bonds and cash to put the vast majority of your money for the long run" was the unequivocal message of Jeremy Siegel's Stocks for the Long-Term. Glassman and Hassett may wish that they had written the book that Seigel wrote, but they didn't.

Moreover, we haven't even gotten into the fact that Glassman and Hassett got their math wrong. As the Economist's Clive Crook told them in May 1998, the 36000 number was "wrong, plain wrong.... Your reasons for believing that the Dow should be at 36,000 are wrong in the same way that it's wrong to say two plus two equals five.... Using your own method, provided only that you put the right variable into the formula, the market is about fairly valued."

*Note how they don't mention the subtitle--it would make the falsity of the claim that "Dow 36000 was not a prognostication" too obvious.

Posted by DeLong at December 6, 2004 05:04 PM

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I think his picture at:
is enough to prevent me from buying advise from him. Never get money advise from someone who took out a loan to get his haircut and buy a suit.

Better information comes from people that pay cash for their haircuts and suits.

Although Andrew might have a better inside help line on the fashion thing.

Posted by: Steve at December 6, 2004 12:42 PM

I highly recommend looking at:
...for another example of Glassman's prognosticatin'. Also keep in mind the time frame and, basically, the administration position on tax cuts and the state of the economy at the time. Do not let anyone tell you that it was clear we were headed here when GWB got re-elected. This is one of their puppets in March of 2001.

Posted by: theCoach at December 6, 2004 01:24 PM

Glassman and Hassett are influential enough to frequently be cited in the Washington Post and New York Times, especially so when what is needed are economists to sneer at liberal thinking and smile at conservatism.

Why a few posts down Hassett is complaining about Peter Diamond of MIT showing "a liberal propensity to dismiss the intellectual merit of Bush's policies, especially his economic proposals."

Posted by: anne at December 6, 2004 01:29 PM

The authors of this book are perhaps more than anything else yet another argument against social security privatization.

Posted by: Green Dem at December 6, 2004 01:49 PM


If P. Bush borrows to privatize Soc. Sec., and that huge borrowing drives bond prices down, how much money will seniors holding bonds wind up losing in the deal?

Posted by: rember at December 6, 2004 02:03 PM

"...don't expect the rise of the Dow to 36000 to occur for three to five years--i.e., until 2002 or 2004..."

Am I the only one here to realize that they've still got 25 days left. Damn knee-jerk liberal pessimists.

Posted by: Jim at December 6, 2004 03:30 PM

Does Tech Central Station post anything that's not complete fiction? Not too long ago, this "resource" was explaining to us that there is no such thing as an "average" temperature, and therefore that all climate science was simply nonsense.

Until the press treats these guys and anyone who chooses to remain associated with them as flat-earthers, we will be in quite a general muddle.

Posted by: BoulderDuck at December 6, 2004 04:19 PM

Could someone please please explain what these number mean?


From Dean Baker by way of Max Sawicky:

I have a test of my own that I have been trying to get economists to take (thus far unsuccessfully), in which I ask proponents of privatization to write down the set of dividend yields and capital gains that will give them the 6.5-7.0 percent real stock returns that they conventionally assume. Such returns were possible in the past because the price to earnings (PE) ratios have historically been much lower and profit growth was much faster.

The price to earnings ratio averaged about 14.5 to 1 over the last seventy years, compared to more than 20 to 1 today. This is important, because if 60 percent of profits are paid out as dividends (or used for share buybacks), this gets you a dividend yield of over 4.0 percent with a PE ratio of 14.5 to one. It gets you just 3.0 percent with a PE ratio of 20 to 1, and of course less when the PE ratio is higher.

The rate of profit growth is important, because if we assume that the price to earnings ratio stays constant over time (the alternatives are that it always increases or decreases) then stock prices will rise at the rate of real profit growth. Historically, real profits have grown more than 3.0 percent annually. The trustees project that real profits will grow at 1.4 percent annually (measured against the consumer price index).

I have argued that the higher than normal PE and the slower than normal projected profit growth imply that returns will be much lower in the future than in the past, but if I'm wrong it should be a very simple matter for Andrew, or any other economist, to produce a set of dividend yields and capital gains that add to the 6.5-7.0 percent they assume in their projections.

Posted by: lise at December 6, 2004 04:55 PM

Well, the earth is locally flat.

In fact, I recall one of their "debunkings" of one of the classic global climate change results involved (among other things) miscomputing the cosine of the latitude, indicating they were not well versed in round-earth "theory".

Posted by: Kuas at December 6, 2004 05:00 PM

Dear Brad,

Is there no way to get around the delays in posting comments? The immediacy of the comments has been wonderful for us. I did like the old way better, though please take such a comment gently. Not all technology advances are advances; not all.

Posted by: lise at December 6, 2004 05:59 PM


That article as Jewish World Review is horrifying.

Just the title makes me want to burn Glassman's house down.

Posted by: KevinNYC at December 6, 2004 06:36 PM


You seem to have missed the subtle pointer Glassman included in the Jewish World Review article you link to. He sees the budget surplus taking off in "a sudden soaring trajectory, like a cruise missile".

The whole point of cruise missiles, of course, is that they hug the ground. They don't soar at all.

Posted by: Tom Slee at December 6, 2004 06:47 PM

Glassman should try the answer I heard from a Middle American con man who fleeced churh people out of their nest eggs. After he talked for awhile about the legal aspects of the case and his prospects of getting off, the interviewer asked him if he felt there were any ethical prolems with what he had done. His answer was something like:

"I look forward, not back; I'm into results, not judgements; and I'm into optimism, not negativity."

Not that Glassman is legally guilty of anything, but he definitely needs people to look to the future in an optimistic, positive way, and not to the past in a judgemental, finger-pointing, negativistic, blaming, "gotcha" way.

Posted by: John Emerson at December 6, 2004 06:55 PM

One of Glassman's arguments is that corporate profit margins would grow ineluctably and turn directly into profits for investors. Funny thing was, he never imagined that corporate chieftains thought the profits were theirs to keep and/or spend on wild-eyed schemes and Enron-like fictions. And that means that Glassman was willfully ignoring history for the imaginary ownership society. And he still seems to be doing it.

Posted by: paulo at December 6, 2004 08:04 PM

Glassman and Hassett first put forth their “Dow 36,000” theory in (I think) two articles in the Wall Street Journal, and then circa 1999 in a longer article in the Atlantic Monthly Magazine. Finally they published their book. I had a big disagreement with the liberal guy down the hall from my office over the Atlantic Monthly article. For some strange reason he really thought the article made sense. And BTW he has a PhD in economics from Stanford University. I gave him about six reasons why the whole G&H theory was ridiculous, and pointed how they really didn’t seem to understand that they misapplied the dividend discount model. Paul Krugman made a similar observation about the same time. Of course you didn’t need a PhD in economics to be stupid about finance, some of the PhD physics and engineering guys also fell for this stuff too. Two guys took their retirement as lump-sum cash out and lost big when the tech bubble burst. The poor bastards. Now it’s deja vu all over again, only this time, real estate.

Posted by: A. Zarkov at December 6, 2004 08:27 PM

Sure, a half-gallon of milk will cost $200 and probably, eventually, $200,000.

But I don't know exactly when.

Posted by: peBird at December 6, 2004 09:41 PM

"Fool me once, shame on you; fool me twice, shame on me."

As someone once said. And someone else once mangled.

Posted by: ahem at December 6, 2004 11:22 PM

Isn't Hassett being mentioned as a replacement for Mankiw? Won't that be nice for Mankiw - having the White House imply he is being let go when he is leaving right on schedule, then being replaced by a guy who doesn't understand the math of finance, and won't admit it?

Posted by: kharris at December 7, 2004 04:42 AM

Sadly, the comments will not respond. But, if they will not respond this comment will not go through. Oh dear :)

Posted by: anne at December 7, 2004 07:22 AM

Unless I've been banned or the decision has been made to the de-emphasize the comments section entirely, the new regime is disfunctional. Three comments I put up yesterday still haven't appeared.

Posted by: John Emerson at December 7, 2004 07:46 AM

As much as I hat to admit it, there may be a sense in which G&H were right (although I'm not going to read the book to see). Adjusted for inflation and the reinvestment of dividends, the Dow ended 1998 at around 31,460. (See Roger G. Clarke and Meir Statman, http://lsb.scu.edu/finance/faculty/Statman/articles/djia%20crossed.pdf and Shoven and Sialm, http://webuser.bus.umich.edu/sialm/DJIA.pdf)

Since investors presumably price securities to account for real expected return, if G&H just used the nominal index, they didn't really capture the true value of the index to investors. In this case, they are simply guilty of being hacks.

If they did account for this, then I apologize for calling them hacks (in this context), and accept my own hackery in failing to buy and read their very fine book.


Posted by: dave at December 7, 2004 07:54 AM


Inventing a Crisis

Privatizing Social Security - replacing the current system, in whole or in part, with personal investment accounts - won't do anything to strengthen the system's finances. If anything, it will make things worse. Nonetheless, the politics of privatization depend crucially on convincing the public that the system is in imminent danger of collapse, that we must destroy Social Security in order to save it.

I'll have a lot to say about all this when I return to my regular schedule in January. But right now it seems important to take a break from my break, and debunk the hype about a Social Security crisis.

There's nothing strange or mysterious about how Social Security works: it's just a government program supported by a dedicated tax on payroll earnings, just as highway maintenance is supported by a dedicated tax on gasoline.

Right now the revenues from the payroll tax exceed the amount paid out in benefits. This is deliberate, the result of a payroll tax increase - recommended by none other than Alan Greenspan - two decades ago. His justification at the time for raising a tax that falls mainly on lower- and middle-income families, even though Ronald Reagan had just cut the taxes that fall mainly on the very well-off, was that the extra revenue was needed to build up a trust fund. This could be drawn on to pay benefits once the baby boomers began to retire.

The grain of truth in claims of a Social Security crisis is that this tax increase wasn't quite big enough. Projections in a recent report by the Congressional Budget Office (which are probably more realistic than the very cautious projections of the Social Security Administration) say that the trust fund will run out in 2052. The system won't become "bankrupt" at that point; even after the trust fund is gone, Social Security revenues will cover 81 percent of the promised benefits. Still, there is a long-run financing problem.

But it's a problem of modest size. The report finds that extending the life of the trust fund into the 22nd century, with no change in benefits, would require additional revenues equal to only 0.54 percent of G.D.P. That's less than 3 percent of federal spending - less than we're currently spending in Iraq. And it's only about one-quarter of the revenue lost each year because of President Bush's tax cuts - roughly equal to the fraction of those cuts that goes to people with incomes over $500,000 a year.

Given these numbers, it's not at all hard to come up with fiscal packages that would secure the retirement program, with no major changes, for generations to come.

It's true that the federal government as a whole faces a very large financial shortfall. That shortfall, however, has much more to do with tax cuts - cuts that Mr. Bush nonetheless insists on making permanent - than it does with Social Security.

But since the politics of privatization depend on convincing the public that there is a Social Security crisis, the privatizers have done their best to invent one.

My favorite example of their three-card-monte logic goes like this: first, they insist that the Social Security system's current surplus and the trust fund it has been accumulating with that surplus are meaningless. Social Security, they say, isn't really an independent entity - it's just part of the federal government.

If the trust fund is meaningless, by the way, that Greenspan-sponsored tax increase in the 1980's was nothing but an exercise in class warfare: taxes on working-class Americans went up, taxes on the affluent went down, and the workers have nothing to show for their sacrifice.

But never mind: the same people who claim that Social Security isn't an independent entity when it runs surpluses also insist that late next decade, when the benefit payments start to exceed the payroll tax receipts, this will represent a crisis - you see, Social Security has its own dedicated financing, and therefore must stand on its own.

There's no honest way anyone can hold both these positions, but very little about the privatizers' position is honest. They come to bury Social Security, not to save it. They aren't sincerely concerned about the possibility that the system will someday fail; they're disturbed by the system's historic success.

For Social Security is a government program that works, a demonstration that a modest amount of taxing and spending can make people's lives better and more secure. And that's why the right wants to destroy it.

Posted by: anne at December 7, 2004 08:14 AM

I was sure that we would see gasoline at ten dollars a gallon before we saw the Dow at then thousand. I was wrong. But we will see the Dow at 36,000. God knows what gasoline will be going for then.
Why is our dollar so high? The central economic question of our time. Can the whole world have central bankers who are insane? Sure, in 1929. No problem. But now?
The Dow could be at 36,000 next week if the dollar fell far enough. I remember the late sixties and early seventies. In 1973 the Dow didn't look that much different than in 1966, but in real terms it had fallen, and was about to fall more.
Gold's price hasn't changed much, except in dollars. When the investment situation has you thinking about buying gold, it is not a good investment situation.

Posted by: wkwillis at December 7, 2004 08:18 AM

Aren't there rumora that Hassett is being considered for a high position in the Administration. Sure hope it doesn't have anything to do with investing money.

And incidentally, why aren't these guys bankrupt? Surely they stretched their credit to the limit to buy stocks, didn't they?

Posted by: Bernard Yomtov at December 7, 2004 08:39 AM

Dow 36000 is the secular economist version of the Second Coming: any day now....

Posted by: EdwinWalker at December 7, 2004 10:58 AM

Comments seem to be working now.
A. Zarkov,
You are recycling comments!! No fair!

Posted by: dilbert dogbert at December 7, 2004 01:46 PM

Tom Slee,
Cruise missles also hit the ground at a high rate of speed and make a god awful crater.

Posted by: dilbert dogbert at December 7, 2004 01:52 PM

I think you are right. But when I wrote I thought it was for the first time. Whoops!

Posted by: A. Zarkov at December 7, 2004 07:01 PM

A risk premium is not a free lunch.

I must confess more than a little puzzlement about Brad's consistent agreement with the idea that "stocks are a far better place than bonds and cash to put the vast majority of your money for the long run." While it may be true that the average return on the stock market as a whole is superior to that on bonds over the very long term, that premium arguably reflects the very real risk that at any particular point in time the return any single real person may get on a stream of investments in stocks may be very much below what they would have gotten from directing that stream into bonds.

Individuals do not retire, get sick, buy retirement homes, or put their kids through college "on the average over the long term." They do those things individually at specific times, so it is quite rational to prefer investments less risky than stocks.

I have long had a suspicion that, on average over the long run, selling naked puts will give a vastly higher return than investing in stocks. There is just that small problem that the occasional market panic may rest your net worth to zero.

Posted by: jm at December 8, 2004 06:52 AM

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