the audit

Dow 36,000, just around the corner (again)

Fourteen years after an infamous book and still 22,000 points down
March 8, 2013

Back in 1999, two American Enterprise Institute guys, James K. Glassman and Kevin Hassett, wrote a book called Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market

Almost instantly infamous–a stock crash began within months–it would become synonymous with crazed bubble-era thinking. Dow 36,000 became the poster child of the kind of dubious, hyped-up personal-finance journalism that is unfortunately never in short supply. Or as Knight A. Kiplinger, editor of Kiplinger’s Personal Finance, put it in a review at the time:

Rock-solid investment advice… Long-term investors can place it on an altar next to the works of Benjamin Graham and Peter Lynch, as well as Warren Buffett’s annual homilies to his Berkshire Hathaway investors.

Glassman and Hassett have spent the last 14 years walking back their book, and saying they didn’t really mean what everybody thought they meant when Glassman, for instance, wrote in the Washington Post the week Dow 36,000 came out that stocks were intrinsically worth triple their then price– if only investors weren’t so unfairly bearish on equities vis-à-vis bonds–and that price-to-earnings ratios should be somewhere around 100. Really!

We say in the book that the Dow should be at 36,000 today, but that realistically the process should take about five years…

We did the arithmetic and found, much to our surprise, that stocks would have to triple or quadruple. P/E ratios could easily be 100…

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Now, investors are getting more reasonable. While many market analysts think that investors are currently off their rockers, we think that, to the contrary, they are finally becoming rational–recognizing the true value of stocks for the long term.

This was mainstream stuff, written at the height of the mania in one of the nation’s top papers. Three months later The New York Times/IHT let Glassman push the specious line–a big bubble backdrop–that the stock market boom was making everybody rich:

If the Dow rises to 36,000, those holdings will be worth about $40 trillion. Since there are roughly 100 million U.S. households, the average family owned about $110,000 in stocks in 1998. When stocks are properly priced, those stockholdings will be worth about $400,000.

A classic AEI example of misleading with statistics, Glassman used average family rather than median family, which gave the false impression that stock wealth is widely held. More than 53 percent of U.S. households had no stocks at all as of 2010, meaning the median American household had zero dollars in stocks 11 years after Glassman was writing.

Glassman’s and Hassett’s walking-back of their book began almost immediately since the stock market began to crash so soon after the book came out.

In a preface to a 2000 edition of the book, Glassman and Hassett sniffed at the “delight of the bears” at the incipient downturn and touted the rise in Cisco, GE, and ADP–stocks they had called cheap–since the book launched. Only ADP is up, slightly, since then (and it took 14 years to get into positive territory). If you bought GE and Cisco after reading that updated preface, you’ve lost about two thirds of your money. Where Glassman and Hassett called Cisco cheap in 1999 when it’s price-to-earnings ratio was at an enormous 85, the company’s P/E now is at a much more realistic 12.5.

By the next year, 2001, the stock crash was undeniable, and earnings multiples had collapsed. Amidst the carnage of the tech wreck, the Post gave Glassman real estate yet again to write this (emphasis mine):

My co-author, economist Kevin Hassett, and I did not predict when this blessed event would occur, and we warned that outside events could send markets down in shocking ways.

Never mind that he had written, in the same paper two years earlier, that “realistically the process should take about five years” to get to 36,000.

A year later, in 2002, he wrote this in a Wall Street Journal op-ed:

What went wrong? Actually, nothing. Despite its flamboyant title, “Dow 36,000” was a book of sober explanation, not of wild prognostication. We calculated that 36000 was the point at which the 30 stocks that comprise the Dow Industrials would be fully valued, and we warned that “it is impossible to predict how long it will take.”

But picking target prices was not what our book was about–nor is it what investing is about.

In other words, never mind the title of my book!

By April of 2007, with credit-default-swap indices already flashing red on a major securitization-market malfunction, Glassman took to the pages of Kiplinger’s to write about “Why Stocks Are a Bargain,” again, six months before the peak of the market.

That’s a whole lotta wrong.

This is all a very long windup for a post about a column that ran yesterday at Bloomberg View by Glassman headlined “Dow 36,000 Is Attainable Again.” I’m not sure whether to laugh with Bloomberg or to laugh at them for running it. Did they run it ironically or because they thought it was worthwhile? Either way, it doesn’t help the editorial page’s credibility, and it’s worth noting that Hassett had a plum Bloomberg columnist gig for years.

It seems Glassman has been waiting for the moment when he could say, “See! I told you the Dow would get to 36,000!” and be vindicated for all time. Now, with stocks finally returning to 2007 levels, he says the magic number is in sight, even if it would require the stock market to more than double from where it is now, be nearly two decades after his book, and still come up many trillions of dollars short:

From its low of 6,547 on March 9, 2009, the Dow has risen 117 percent. Another 117 percent in four years would put it at 31,022, just 16 percentage points shy of the magic number

In the long run we are all dead.

Glassman actually writes this sentence, still holding on to hopes that P/Es in the triple digits will become standard:

One way stocks could jump to 36,000 quickly would be for fears to subside and P/E ratios to rise.

Well, no kiddin’. Another bubble would be great news for stock prices and for the never-ending Quest for Dow 36,000. Bubbles are way easier than growing corporate profits, particularly when median incomes have been shrinking. The Dow’s P/E is at 15.7, which is actually already higher than the historical average.

But my favorite part of this column is where Glassman says that investors would come around to fully valuing stocks and send the Dow to 36,000 if only various right-wing think tank policies would be adopted, like tax cuts, deregulation, school vouchers, and getting old people off the dole and back to work:

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 …

Scratch that. My favorite part is the disclaimer, where it says “James K. Glassman is executive director of the George W. Bush Institute.” That sounds about right.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.