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Guest Post: Dow 36,000 Is Back

Tyler Durden's picture


Submitted by John Aziz of Azizonomics blog,


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.

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Fri, 03/08/2013 - 10:55 | 3312023 LawsofPhysics
LawsofPhysics's picture

Dow 36,000, bread $50, wonder how they will fund SNAP when the food costs skyrocket? 

Fri, 03/08/2013 - 11:01 | 3312055 The Juggernaut
The Juggernaut's picture

Cue Ben Bernanke and his chorus of printers!

Fri, 03/08/2013 - 11:03 | 3312059 Spirit Of Truth
Spirit Of Truth's picture

Peak collective American insanity just before the fall:


Fri, 03/08/2013 - 11:04 | 3312063 YBNguy
YBNguy's picture

SNAP, WIC, & EBT to be replaced with shares of Apple

Fri, 03/08/2013 - 11:10 | 3312086 El Viejo
El Viejo's picture

Funny, how we send people overseas to fight extremists and we have a boat load right here.

Fri, 03/08/2013 - 11:24 | 3312133 SafelyGraze
SafelyGraze's picture

did someone say zombie?


spoiler: the jewel wasp turns a cockroach into a zombie. the wasp's offspring feeds off the cockroach.

sheeple = cockroaches

debt = neurotoxin

Fri, 03/08/2013 - 12:01 | 3312236 DaveyJones
DaveyJones's picture

I'll give him one thing. Many have succumbed to " a radically new way to determine what stocks are actually worth"

Fri, 03/08/2013 - 14:39 | 3312749 Dr Paul Krugman
Dr Paul Krugman's picture

And this is why I read Zero Hedge - Tyler, we agree!  The Dow Jones to 36,000 call is one where we are all supposed to feel like everything is fine, yet this book was written by the Founding Executive Director of the George W. Bush Institute!

Tyler, we are more alike than you know.  Please stop the ad hominen attacks and realize that what the world needs now is revenue; the way to achieve revenue is not by cutting back on spending.

 From the Department of Things That Are Just Too Perfect:


Fri, 03/08/2013 - 15:42 | 3313020 TruthInSunshine
TruthInSunshine's picture

Only on Wall Street could one write a book 14 years ago about how the then 12k Dow was going to hit 36,000 ostensibly any day now, see a great purge where dozens of trillions of equity "investments" got wiped out not once, but multiple times since, and then be invited back onto a fucking dipshit-clown show network like cnBSc or BloomTURD to talk about the same topic, 14 fucking years later, RATHER THAN BEING PERMANENTLY MOCKED RIGHTFULLY FOR BEING A DOUCHEBAG EMERITUS!!!!


Fri, 03/08/2013 - 12:03 | 3312247 NotApplicable
NotApplicable's picture

Maybe they'll reprint the book with a new forward by David "Balls to the Wall" Tepper.

Good article John.

Fri, 03/08/2013 - 12:03 | 3312248 Silver Bully
Silver Bully's picture

'did someone say zombie?'

You can't fight the Fed. Bernanke's printing is like a virus taking over a human being and turning them into a walker. A horde of dead currency has flooded the market, and just keeps going. Don't be a hero, you'll just run out of ammo. Get out, hunker down. The faster this market gets to 'Dow 36,000' the faster the dollar reaches '0'.

This isn't the Walking Dead . . . it's the Walking Fed.


Fri, 03/08/2013 - 11:17 | 3312096 fomcy
fomcy's picture

"Dow 36,000, bread $50" Don't worry Bernank will print bread as well..

Fri, 03/08/2013 - 11:30 | 3312152 SafelyGraze
SafelyGraze's picture

print bread, then lend it to you

Fri, 03/08/2013 - 11:43 | 3312188 Grimbert
Grimbert's picture

He can have it back after I've finished with it.

Fri, 03/08/2013 - 15:35 | 3312998 Jam Akin
Jam Akin's picture

It'll be ripe for fabrication into Krugman-rands at that point.

Fri, 03/08/2013 - 12:24 | 3312355 OutLookingIn
OutLookingIn's picture

Dow 36,000

Gold $21,000.00/oz

Silver $550.00/oz

Fri, 03/08/2013 - 14:01 | 3312673 EscapingProgress
EscapingProgress's picture

If DOW=36000 then USD=zilch.

Fri, 03/08/2013 - 13:12 | 3312490 King_of_simpletons
King_of_simpletons's picture

Unemployment has to go down to 6.5% for the Feds to start raising rates soon. Once unemployment magically hits 6.5%, the feds will start raising rates again. They are in a hurry to accomplish this. We will start seeing the feds raise rates by the end of summer. Everyone is in a hurry to meet their target. The stock market is hurrying upward to withstand the plunge ones the Feds start raising rates, the BLS fudge is in a hurry to make unemployment go down to 6.5 %. Every damn fudge machinery is in overdrive to meet their targets. The illusion of order and reasoning has to be maintained

Fri, 03/08/2013 - 10:55 | 3312025 SheepDog-One
SheepDog-One's picture

If the DOW were to ever hit 36,000 life would be so awful you'd wish your mother would never have been born.

Fri, 03/08/2013 - 10:59 | 3312044 francis_sawyer
francis_sawyer's picture

If it ever did something like that, I'm sure it would just rocket straight thru to 66,600 just for shits & giggles...

Fri, 03/08/2013 - 12:18 | 3312326 whotookmyalias
whotookmyalias's picture

Woohoo, I'll be rich beyond imagination.  

Fri, 03/08/2013 - 13:20 | 3312526 King_of_simpletons
King_of_simpletons's picture

You will be rich in toilet paper. It's all relative.

Fri, 03/08/2013 - 15:51 | 3313043 whotookmyalias
whotookmyalias's picture

LOL, I forgot the /sarc

Figured that would be redundant. You people are uptight today.

Fri, 03/08/2013 - 11:08 | 3312078 Dead Canary
Dead Canary's picture

Does anyone recall where the German stock market topped out at in 1923?

Fri, 03/08/2013 - 11:15 | 3312104 pods
pods's picture

DOW 36,000.

In other news, bread: 37,000 per loaf.

Gas:  Haha.

Chocolate rations have increased to 20 grams per week, and there is no truth to the rumor that it is, in fact, ground up peat and incinerated dissidents.


Fri, 03/08/2013 - 12:07 | 3312266 Silver Bully
Silver Bully's picture

'Does anyone recall where the German stock market topped out at in 1923?'

I think you should be concerned where Zimbabwe topped out. That's a bit more recent (and a world record, I believe).

Fri, 03/08/2013 - 10:57 | 3312032 fonzannoon
fonzannoon's picture

My book "DOW 36,100" will be available in paperback next month and can be found on the shelf in between the book above and "7 minute abs" at your local Barnes and Noble.



Fri, 03/08/2013 - 11:12 | 3312091 SheepDog-One
SheepDog-One's picture

'6 Minute Abs'

Fri, 03/08/2013 - 11:12 | 3312094 AlaricBalth
AlaricBalth's picture

You must be dreamin' about Gorgonzola cheese when it's clearly Brie time, baby. Step into my office, cuz you're fuckin fired. 

Fri, 03/08/2013 - 11:14 | 3312095 Dr. Engali
Dr. Engali's picture

My book on " 6 minute abs" will be taking it's place.


edit.. damn you sheepdog, now I have to rewrite and retitle my book to '5 minute abs'.

Fri, 03/08/2013 - 11:52 | 3312213 Dead Canary
Dead Canary's picture

Ooo, check out my new book, "How to make it rain beer"

Fri, 03/08/2013 - 10:57 | 3312034 francis_sawyer
francis_sawyer's picture

How are those 'PROFIT TO EARNINGS' figures looking?

Fri, 03/08/2013 - 10:57 | 3312035 Stonedog
Stonedog's picture

Sign of market top if there ever was one....

Fri, 03/08/2013 - 11:20 | 3312121 EscapeKey
EscapeKey's picture


Every Ivy League educated economist will tell you that market tops only exist in precious metals. And possibly other commodities.

Equities - much like housing - only ever increase in price, and leveraging endlessly higher only ever result in glorious success.

Fri, 03/08/2013 - 12:10 | 3312277 Silver Bully
Silver Bully's picture

'Equities - much like housing - only ever increase in price, and leveraging endlessly higher only ever result in glorious success.'

Oh? Kinda like that 'permenant plateau' for real estate prices we saw circa 2007? That worked out marvelously. Just keep your bubble away from reality's pins.

Fri, 03/08/2013 - 10:57 | 3312036 mess nonster
mess nonster's picture

Everyone should read it! Extraordinary Delusions and the Madness of Crowds, I mean.

Fri, 03/08/2013 - 10:58 | 3312037 Cognitive Dissonance
Cognitive Dissonance's picture

Considering the desperate propaganda efforts by Banana Ben and his merry band of FMOC henchmen to convince us otherwise we all know QEX.x is here 4EVA.

So, taken from that point of view DOW 36,000 is definitely on the radar. And so is $5,000+ Gold and $250+ Silver.

Fri, 03/08/2013 - 11:14 | 3312097 SheepDog-One
SheepDog-One's picture

Problem is, if DOW got to 36,000, gold and silver would probably be around 95% lower than where they are now due to Central Printers monkey hammering of it.

Fri, 03/08/2013 - 12:34 | 3312398 Shell Game
Shell Game's picture

You're a funny guy, SheepDog.  Thanks for the nightmare visual...

Fri, 03/08/2013 - 12:35 | 3312399 Silver Bully
Silver Bully's picture

'Problem is, if DOW got to 36,000, gold and silver would probably be around 95% lower than where they are now due to Central Printers monkey hammering of it.'

If Congress mandated a permanent gold price of $10 an ounce, the market would explode. You wouldn't find a scrap of gold ANYWHERE, and people would be swapping it in reality for multiples higher, much like drugs or alchohol during Prohibition. Market manipulation has a similar effect, on a smaller scale. Scarcity occurs and real world prices break away from paper prices. We're already seen this for a few years. Premiums for PM's right now are outrageous, and getting higher. Supply is harder to find with each passing year. At some point, the paper market simply breaks, much like Bretton Woods. Eventually, the manipulation can no longer mask reality.

Central Planning does not work, plain and simple. Reality will eventually reimpose itself no matter what the Fed says the price is (through JPMorgan, et al.)

Fri, 03/08/2013 - 10:58 | 3312038 Sandy15
Sandy15's picture

Is it me or does it seem The Bernack is not holding the market up today.  Market is really acting weird......I watch 5 min charts, so.....

Fri, 03/08/2013 - 11:18 | 3312112 EscapeKey
EscapeKey's picture

Personally, I think we should give up on this bid-ask spread nonsense. Instead, we should have a central planner tell us what the stock prices are at close.

And since we know that central bankers are incorruptible, who else but Bernanke to announce the glorious prices at end of play.

This way, we will entirely conquer the efficient market hypothesis once and for all. What could possibly go wrong?

Fri, 03/08/2013 - 11:59 | 3312231 Vince Clortho
Vince Clortho's picture

Great idea.  Why not just have Bernank produce a chart of Stock prices for the coming year.

It would be a tremendous investment tool.

Fri, 03/08/2013 - 10:58 | 3312041 yogibear
yogibear's picture

"bread $50"

It doesn't matter to those on Wall Street. Buying a $500/bottle of wine  will be nothing.


The central bankers will make just that much more.


Fri, 03/08/2013 - 11:30 | 3312151 LawsofPhysics
LawsofPhysics's picture

Do they produce their own food?  I don't think so?  Are you suggesting that they will eat each other?  In that case, rally on!

Fri, 03/08/2013 - 10:59 | 3312046 BandGap
BandGap's picture

WTF just happened to silver?

Fri, 03/08/2013 - 11:08 | 3312081 Debtonation
Debtonation's picture

Got me scratching my head too

Fri, 03/08/2013 - 11:12 | 3312092 Debtonation
Debtonation's picture

S&P also now slipping negative

Fri, 03/08/2013 - 11:51 | 3312209 LawsofPhysics
LawsofPhysics's picture

Treasury yeilds on the ten year got above 2.0%.  Must beat that back down by shifting some of the capital in order to keep a bid under treasuries.  Expected, the ten year has been range-bound for a while now.

Fri, 03/08/2013 - 12:06 | 3312262 NotApplicable
NotApplicable's picture

Looks like somebody sprung it like a diving board.

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