The Dow Jones Industrial Average (^DJI) made a fresh high, joining its cousin the S&P 500 (^GSPC) and now we await the Nasdaq (^IXIC) to push above 5,048. Instead of celebrating prosperity here’s what the media is likely to do which is the wrong attitude.
Trot out the usual cast of fearmongers to tell everyone why a biblical crisis is in our immediate future. This week it was Nobel Prize winning Yale Professor Robert Shiller. Shiller is better known for his work on housing but he’s also got a stock model called the Cyclically Adjusted Price-Earnings Ratio, or CAPE. According to Shiller’s CAPE ratio stocks haven’t been this expensive since the middle of last decade… that’s right, before the Financial Crisis. In fact looking at the long-term CAPE you can see it peeking prior to the dot-com bubble bursting and the Great Depression.
“It looks like a Peak” cautioned Shiller. Unfortunately any Green Bay Packers fan can tell you what things look like and reality are only sometimes in sync. It turns out the CAPE has literally no statistical relationship to future market returns. None. Citigroup (C)i charted the numbers. While the results verify the lack of any predictive value for CAPE the scatter plot looks a little like a sorting hat. In this case, it’s directing users to stick to academia.
Shiller freely admits CAPE isn’t a predictive tool. I’m not picking on him. Quite the opposite. As fear mongers go Shiller is the best of them. The worst is probably Marc Faber who emerges from a cave in Switzerland periodically to call for “an 1987 level crash”. Faber started making that explicit prediction in spring of 2012 when he said the chances of a global recession that year or 2013 were 100%. He was wrong of course but that was a better call than his 2009 prediction that the U.S. would suffer hyperinflation levels only seen in Zimbabwe. For the record Zimbabwe experienced 231 million percent inflation that year. If Faber isn’t wrong on that call he is very, very, very early.
Everyone’s gotta eat. If you edit a newsletter called Gloom, Boom and Doom you’re probably going to lean bearish. What you as a consumer of financial news have to realize is that these guys are talking their books, or newsletters. Unlike Faber’s predictions, the CAPE ratio, the Hindenburg Omen or any other indicator that’s suggested a crash was imminent over the last 10 years history is very clear on the relative risk between listening to the Cassandras and investing on the assumption the world will still be here for your kids to ruin. Both history and the future belong to the optimists.
James Altucher said something great when I interviewed him for my book. “There are two ways to survive as a financial pundit” he told me. “You can either make people money, which is very hard or scare them which is relatively easy.”
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