UPDATE: No I'm Not in the Stanford SIEPR Associates Obama vs. McCain Debate Tonight...
CLARIFICATION: I'm not debating Kevin at 5, but Peter Henry is...
As I understand it, originally Douglas Holtz-Eakin was supposed to debate Austan Goolsbee. Then Doug dropped out (I am not sure whether the statement that he had to go brief Sarah Palin was a joke or not). Kevin Hassett replaced him. Then Austan dropped out. And I replaced Austan.
Then Kevin said that he wouldn't come out of his hotel room if I were in the building.
I think this is a substantial mistake on Kevin's part.
(A) The topic is not his 1999 book Dow 36000: The New Strategy for Profiting from the Coming Rise in the Stock Market. The topic is Obama vs. McCain in the presidential election.
(B) Even if the topic were his 1999 book Dow 36000: The New Strategy for Profiting from the Coming Rise in the Stock Market, every time he hides from critics he does himself damage. If he still thinks that his late-1999 forecast that the Dow was about to triple in the next three-to-five years, he should defend it as the best forecast that could have been made at the time--and tell us why it did not come true. If he thinks that his late-1999 forecast that the Dow was about to triple in the next three-to-five years was not a good forecast then, he should recant. But hiding is never good.
And now that the issue is on the table again...
To be brief, the problems with Dow 36000: The New Strategy for Profiting from the Coming Rise in the Stock Market were:
Hassett got the math of the Gordon equation for valuing the stock market simply wrong. It's not the earnings yield that shows up in the numerator, it's the dividend yield. The book should have been called Dow 22000.
Hassett got the math of the equity premium wrong. The weighted average of the returns on bonds and stocks is the return on capital. The equity premium is a wedge between the rate of return on stocks and the rate of return on bonds. If the equity premium falls, the rate of return on stocks falls and the rate of return on bonds rises. Hassett calculated the effect of a fall in the equity premium by fixing the rate of return on bonds. The book should have been called Dow 15000.
The argument that the equity premium ought to go away is one you can make. The argument that the equity premium will go away in the next three to five years drastically understates uncertainty.
To argue toward the end stages of a bubble--when all standard indicators of fundamentals are blinking red and forecasting five-year equity returns of zero or less--that your readers should double up on their stock portfolios to "take advantage of the coming rise in the stock market" does not strike me as what my nursury school teacher used to call "playing well with others." It's kind of like treating your readers the way John-John Crummell treated the guests at my fifth birthday party when he lit the tablecloth on fire.
This does have a bearing on the presidential election. John McCain is holding himself out as the scourge of Wall Street. He is doing so while standing beside Ms. Carly "Golden Parachute" Fiorina and while sending out Mr. Kevin "Bubbles" Hassett as an advisor-surrogate. Something is wrong with this picture.
And with this picture
And now let's turn the mike over to Kevin Hassett, from his Dow 36000: The New Strategy for Profiting from the Coming Rise in the Stock Market:
The Dow should [i.e., ought logically to] rise to 36000 immediately [that is, in October, 1999]...
[We] believe the rise will take some time, perhaps three to five years...
[S]eize the opportunity now [i.e., in late 1999] to profit from the rise in the Dow to 36000...
[W]e 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..."
