Worst Think-Tank Fellows of All Time: Kevin Hassett and James K. Glassman: And, of course, a worst think-tank award of all time to the American Enterprise Institute for paying them a salary.
Let's turn the mike over to Barry Ritholtz:
Lessons to Be Learned From Dow 36,000 | The Big Picture: September 20, 2009:
This book will convince you of the single most important fact about stocks at the dawn of the twenty-first century: They are cheap….If you are worried about missing the market’s big move upward, you will discover that it is not too late. Stocks are now in the midst of a one-time-only rise to much higher ground–to the neighborhood of 36,000 on the Dow Jones industrial average.
Glassman and Hassett, introduction, Dow 36,000
Call it the audacity of cluelessness: Let us congratulate James K. Glassman and Kevin Hassett, the authors of the incredibly money losing advice in their book Dow 36,000, on their 10 year anniversary. The book forecast that lofty number would be obtained in 3 to 5 years; it was published precisely 10 years ago today.
In the ensuing decade since this book (and I use the term lightly) was published, the Dow is still below where it was 10 years ago, rather than tripling in price. The Nasdaq remains more than 60% below its highs of one decade ago.
I tried to read the book as a history lesson, but it was, to be blunt, unreadable. I got through enough to learn the basic argument they made: Stocks have been undervalued for decades, and over the ensuing years, we should expect a dramatic one-time upward adjustment in stock prices. Why? People were about to figure out what only these two geniuses already knew (hubris anyone?)…
Brad DeLong: And Jim Macdonald Reminds Me We Really Can Never Retire the "Stupidest Man Alive" Prize: First, an announcement from Jim Hassett:
Being proud of my Irish Hassett ancestors (not to mention my descendants), I'd like to take this occasion to say that I have no known family connection (or any other connection, for that matter) to Kevin Hassett (or his economic and political views).
Jim Macdonald:
Making Light: Everything You Know is Wrong: And here I thought I wrote science fiction.
“Every stock owner should read this book.” — Allan H. Meltzer, professor of political economy, Carnegie Mellon University
- A radically new way to determine what stocks are really worth
- Why the Dow is still poised to zoom
- Why the financial establishment is wrong
- Why stocks are actually less risky than bonds
- How to build a maximizing portfolio and invest without fear
“One of the hottest business books around… . It has wonderfully clear explanations of financial theory [and] excellent advice on general investing approaches.” — Allan Sloan, Newsweek
“It may sound like headline-grabbing sensationalism, but the scholarly and punctilious authors make a persuasive case … the book is highly readable and witty.” — Arthur M. Louis, San Francisco Chronicle
“Dow 36,000 is a provocative and well-written treatise that cannot be dismissed… .” — Burton G. Malkiel, Wall Street Journal
“Dow 36,000: Everything you know about stocks is wrong.” — Jim Jubak, Worth magazine
The book, as you may have gathered, was Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market. It was published on 01 October 1999, reissued in paperback on 14 November 2000. In proving beyond the shadow of a doubt that the stock market would only rise, and rise more sharply than ever before, authors James K. Glassman and Kevin A. Hassett confidently predicted that the Dow would hit 36,000 by 2005.
1999 was the very height of the dot.com stock market bubble. Dow 36,000’s basic message was that stock prices would keep going up forever. As to how this would happen, it was because every economist who had written since “economist” became a profession was wrong.
You know the cartoon where the business plan has a block labeled “Then a miracle happens” just before the block labeled “Profit!”? That’s what was being presented in three hundred pages of witty and provocative prose, and what engendered such wonderful pull quotes from reviews. The authors were … vague … about the exact process by which the wonderful results would come to pass.
“They laughed at Galileo. But they also laughed at Bozo the Clown.” —attributed to Carl Sagan
Glassman and Hassett’s particular discovery relied on people suddenly (and for no discernible reason) acting differently than they had since the invention of the stock market. This falls squarely under Sign #7 of the Seven Warning Signs of Bogus Science: 7. The discoverer must propose new laws of nature to explain an observation.
Blackadder: Look, there’s no need to panic. Someone in the crew will know how to steer this thing.
Captain Rum: The crew, milord?
Blackadder: Yes, the crew.
Captain Rum: What crew?
Blackadder: I was under the impression that it was common maritime practice for a ship to have a crew.
Captain Rum: Opinion is divided on the subject.
Blackadder: Oh, really?
Captain Rum: Yar. All the other captains say ‘tis; I say ‘tisn’t.
Blackadder: Oh, Ghod; Mad as a brush.
As we now know, the Dow-Jones high of 11,700 on 14 January 2000 has yet to be exceeded (once one adjusts for inflation). Far from hitting 36,000 by 2005, the market collapsed (as will happen with bubbles) to a closing low of 7,286.27 on 09 October, 2002, less than two years after the paperback edtion of this book hit the streets. Worse was to come: the Dow closed at 6,547 on 09 March 2009, a 12½ year low. As it turned out, everything that anyone who wasn’t Glassman and Hassett knew about stocks was right.
Nothing that you will learn in the course of your studies will be of the slightest possible use to you in after life, save only this, that if you work hard and intelligently you should be able to detect when a man is talking rot, and that, in my view, is the main, if not the sole, purpose of education. —John Alexander Smith, professor of moral philosophy at Oxford, 1914,
Dow 36,000 was serialized in the Atlantic Monthly; it was a Money Book Club main selection and a Book Of The Month Club alternate selection; the authors got a five-city tour. Glassman went on to found the George W. Bush Institute, “an action-oriented organization focused on independent, non-partisan solutions to America’s most pressing public policy problems.” Hassett remains an economist at the American Enterprise Institute.
Ryan Avent:
How's that working out for you? | The Economist: THE Washington Post has an interview with James Glassman, co-author of Dow 36,000 (with Kevin Hassett), up on its website today. In 1999, the year of the book's publication, the Dow's lowest point was just north of 9,100 points. For those who aren't aware, the Dow's current price is just north of 6,700. A snippet:
[B]ased on our calculations, we believed that stocks would rise to roughly 36,000. We said in the book that it is impossible to predict how long it will take for the market to recognize that Dow 36,000 is perfectly reasonable, but then, of course, we did take a guess.
You said three to five years.
Obviously that hasn't happened. I think the question investors are facing now is, "is history a guide?" In "Dow 36,000" we looked at history in, I think, a completely reasonable way and said a) you ought to be in the stock market b) stocks are very much undervalued...
Do you still think it will hit 36,000?
I have no doubt about that. I think that is absolutely true. But I'm not going to tell you what date.
Aw, c'mon. Tell us the date!
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)…. 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… 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…. Moreover, we haven't even gotten into the fact that Glassman and Hassett got their math wrong…..
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.
Matthew Yglesias:
Bush 36,000 | ThinkProgress: I, for one, cannot think of a better man to serve as custodian of the Bush legacy:
Former President George W. Bush took a step closer Thursday to establishing an “action-oriented think tank” alongside his future presidential library by naming James K. Glassman, the longtime journalist and former administration official, as its founding executive director.
Mr. Glassman, who served in the Bush administration as chairman of the Broadcasting Board of Governors and later undersecretary of state for public diplomacy and public affairs, will be charged with building a public policy institute intended to advance some of the issues that Mr. Bush embraced as president.
Glassman is, of course, better known to bloggers who like to make fun of know-nothing conservatives as the author of the late nineties bestseller Dow 36,000. I think that’s the kind of detachment from reality you need to dedicate your life to bolstering the reputation of the Bush administration.
Brad DeLong: More Glassman and Hassett Blogging (Atlantic Monthly Crashed-and-Burned Watch): Ah. I had forgotten that the Atlantic Monthly--failing to consult with anybody knowledgeable... or half knowledgeable... or quarter knowledgeable...--gave James Glassman and Kevin Hassett their first platform for "Dow 36000." J.E. emails:
Although he seems to regret it now, Glassman got fairly specific with a stock market prediction back in 2000. He pledged to donate $1000 to charity if the Dow was less than 23,000 in January 2010, and said that his coauthor Hassett would do the same.
From the “Letters” section of the Atlantic Monthly, January 2000 issue:
[A reader wrote in as follows:] The core of Glassman and Hassett's theory of stock value consists of a giant fallacy. In the past, they remind us, stocks have almost always returned more to the investor, over long periods of time, than bonds have, so owning them entails less risk than holding bonds. Consequently, they assert, the market should bid up stock prices to the point where the expected return from stocks is no greater than the interest rate on Treasury bonds.... No one is going to expose himself to the vastly greater short-term volatility of stocks if he cannot count on the near certainty of a superior return further down the road. For the same reason, the market demands nearly two percent more return from long-term bonds than it does from three-month bills, though both securities are equally "safe" in the sense that both interest and principal will ultimately be paid.
Stocks are amply priced now. Using the authors' dividend-yield-plus-growth-rate formula, the universe of American stocks should return seven percent to eight percent [nominal] over the next generation-only one percent or so more than Treasury bonds, and no more than corporate bonds. I would be willing to bet Glassman and Hassett that even ten years from now, when earnings and dividends should have nearly doubled, the Dow Jones Industrial Average will still be closer to its current level of 11,000 than to their hyperbolic projection of 36,000.
J. Douglas Van Sant, Stockton, Calif.
James K. Glassman and Kevin A. Hassett reply:
To J. Douglas Van Sant we say, if the Dow is closer to 10,000 than to 36,000 ten years from now, we will each give $1,000 to the charity of your choice.
And bonus:
Brad DeLong: When Allan Meltzer Ceased Being a Real Economist...: Those of us who liked Allan Meltzer's history of the Federal Reserve were shocked when he showed up this summer as a Republican hack, writing:
http://gopleader.gov/UploadedFiles/10-30-09_Meltzer_memo.pdf: There is no greater recognition of the failure of the stimulus program to create jobs than the efforts to mislead the public into believing the program had saved thousands, or millions, of jobs. One can search economic textbooks forever without finding a concept called “jobs saved.” It doesn’t exist for good reason: how can anyone know that his or her job has been saved? The Administration can make up any number it pleases. The number has no meaning...
As I wrote at the time:
If the concept of "jobs saved" does not exist, how come [in his Monetary History of the United States] Milton Friedman says that an extra $1 billion of open market operations in late 1931 would have stopped the Great Depression in its tracks?...
It has now been pointed out to me that the rot is at least a decade old: Allan Meltzer gave a truly remarkable blurb to Kevin Hassett and James Glassman's Dow 36,000 a decade ago:
Every stock owner should read this book
As you will all recall, there are three big things very wrong with Dow 36,000:
*Its arithmetic is simply wrong: they use the earnings yield where the valuation formulas say to use the dividend yield.
*It is extremely hazardous to confidently predict the complete evaporation over the next three-to-five years of a market phenomenon--the equity return premium--that has been around for more than a hundred.
*Should the equity return premium ever collapse, it will collapse not with a fall in the required return on stocks to the current real Treasury bond required return, but by a convergence of both stock and bond returns to some intermediate value.
Allan Meltzer should have known better. Indeed, I suspect that at the time he did know better.
Bonus: Economist of Mass Destruction Kevin "Dow 36000" Hassett Update...: Was this part of the "Stupidest Man Alive" series or of the "Republican War on Science" series or of the "American Enterprise Institute Quality Research" series? Silly question! It was part of all three. It was when Kevin Hassett called for the USAF to attack France and Switzerland to stop CERN's Large Hadron Collider from going into action.
Business Week should still hide itself from the sun in shame:
Atom Smasher Exposes Hole in Earth’s Defenses: The Large Hadron Collider... consumes about the same amount of energy as a large city... could provide evidence of the existence of the Higgs boson, a hypothesized particle that has become known as the God particle.... [T]he collider’s energy could induce a catastrophic event. A brilliant review of the risks associated with the experiment by University of North Dakota law professor Eric Johnson.... LHC’s high-energy collisions might create a microscopic black hole that would, perhaps over a few years, swallow the Earth.... Oxford University’s Toby Ord, a philosopher by training, adds... [i]t may be that the models that we use to make predictions about the possibility of catastrophe are themselves flawed.... Ord estimates that the odds of the LHC producing a disaster are between one in 1,000 and one in 1 million... the likely benefits from this experiment... [cannot]... justify accepting a cost that includes a real risk of the Earth’s destruction.... Right now... [if] the U.S. wanted to stop the LHC experiment, it would have no recourse short of military action...
This did indeed carry the Republican War on Science to previously unplumbed depths of human stupidity. Let me just say that, IIRC, Leon Lederman named the hypothesized Higgs boson the "God particle" as a joke, because its effects were everywhere yet nobody had ever seen it in the flesh--not because it was in any way powerful or dangerous or numinous or terrifying.
Worth revisiting because of Roger Ebert, who tweets:
Twitter / Roger Ebert: Headline: Large Hadron Col ...: Headline: Large Hadron Collider test carried out. Subhead: Earth [still] here.
