Department of "Huh?!?!?!"
links for 2010-01-10

Bubbleheads II

Mark Thoma writes:

Economist's View: Bubble? What Bubble?: Here is Ellen McGrattan and Edward Prescott in 2000 telling everyone not to worry about a bubble in the stock market. They don't call them bubbleheads, but the message is clear:

...Is the current stock market value too high? Glassman and Hassett (1999) have argued that it is not. In fact, they have said that the market is undervalued by a factor of three. But others have expressed concern that the market is, indeed, overvalued. Federal Reserve Chairman Alan Greenspan (1996), for example, has suggested that the recent high value of the market may  reflect “irrational exuberance” among investors. Shiller (2000) has reiterated this concern and said that a 50 percent drop in the value is plausible....

Conclusions Some stock market analysts have argued that corporate equity is currently overvalued. But such an argument requires a point of reference: overvalued relative to what? In this study, we use as our reference point the predictions of the basic growth model that is the standard model used by macroeconomists today. We match up all the variables in our model with the U.S. national income and product account data. We find that corporate equity is not overvalued...

S&P 500, June 30, 2000 close: 1455
S&P 500, December 31, 2009 close: 1145
Consumer Price Index, November 2009/June 2000: 1.26

Real price decline: -37.5%

I score this one for Bob Shiller...