Dow 36,000

Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market is a book by James K. Glassman and Kevin A. Hassett largely discredited for misstating the risk characteristics of equity securities as equivalent to fixed income securities, but commonly believed discredited for predicting a grossly inflated stock market. It was published in 1999, shortly before the dot-com bubble burst, and predicted that the Dow Jones Industrial Average would rise to 36,000 within a few years. Parts of the book were also published in The Atlantic Monthly.^[1] The number 36,000 is arbitrary as it is an artifact of rebalancing the "divisor" in the Dow Jones Industrial Average each time a stock splits.

In the introduction to the book, Glassman and Hassett wrote that the 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."^[2]

The Industrial Average reached a record high of 11,750.28 in January 2000, but after the bursting of the dot-com bubble, and the September 11 attacks of 2001, it steadily fell, reaching a low of 7,286.27 in October 2002. Although the Average recovered to a new record high of 14,164.53 in October 2007, it crashed back to the vicinity of 6,500 by the early months of 2009, amidst a global recession.

In the January 2000 issue of The Atlantic Monthly, Glassman and Hassett replied to a critic of their theory that "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."^[3] For the Dow to be closer to 10,000 than to 36,000, it would have to be below 23,000. As things turned out, the index was not even at half that figure ten years after Glassman and Hassett's prediction (the Dow's highest close in January 2010 was 10,725, reached on 19 January). In early 2010, Glassman and Hassett conceded their loss of the bet and each donated $1,000 to the Salvation Army.^[4]

Summary of main argument

The argument of Glassman and Hassett has been summarised by John Quiggin, writing in the Australian Financial Review.

Glassman and Hassett believe that both investors and official commentators have misperceived stocks as a risky investment which should require a premium return, when compared to ‘safe’ investments such as government bonds.

If stocks and bonds were treated as equally risky, Glassman and Hassett argue, the Dow Jones index would be around 36000. Hence, anyone who gets in now and stays for the long haul, can expect returns of around 300 per cent (in addition to the normal interest rate) as the rest of the market wakes up. Once this historic correction is over, the efficient-market hypothesis will hold sway.^[5]

Controversy

In the course of the 2008 election campaign, Nobel-prize laureaute Paul Krugman criticised Hassett's position as an adviser to Republican presidential candidate John McCain, saying:

We’ve known for a long time, of course, that Mr. McCain doesn’t know much about economics — he’s said so himself, although he’s also denied having said it. That wouldn’t matter too much if he had good taste in advisers — but he doesn’t. Remember, his chief mentor on economics is Phil Gramm, the arch-deregulator, who took special care in his Senate days to prevent oversight of financial derivatives — the very instruments that sank Lehman and A.I.G., and brought the credit markets to the edge of collapse... And last year, when the McCain campaign announced that the candidate had assembled “an impressive collection of economists, professors, and prominent conservative policy leaders” to advise him on economic policy, who was prominently featured? Kevin Hassett, the co-author of “Dow 36,000.” Enough said.^[6]

Krugman has, in newspaper columns^[7][8] and on the Internet,^[9] stated that he regards the main thesis of Dow 36,000 as not merely false but "silly".

References

External links

• Booknotes interview with Glassman on Dow 36,000, 3 October 1999.