Update on March 22:
Here are the pictures of the data Thaler mentioned. Not a great combo on Thaler’s logic. I have a non-view of the market: subpar returns, which has so far been “premature.” Up irritatingly and then down sharply would add up to that, I guess. But the second part has not happened. Do with this as you will. Better still, test it empirically, first. I am worried about the collapse of civilization more than the stock market.
One fun fact, re valuation: the ML survey’s turn was more abrupt, but is today similar to what Shiller finds. People think they are expensive.
Richard Thaler responds:
What you probably saw me do is ask the following pair of questions about a portfolio of internet stocks: what is their intrinsic value? and what will prices do over the next 6 months. Most said overvalued and going up. The same is true today.
I’ll take it. I got like 22 followers on Twitter. I would not have elaborated much further if I were him responding to me. But I wish he had. I am sure he gets a lot of mail and is a busy guy. If he were to write about this issue in depth, then I for one would read it.
Without an indication of magnitude, I can’t make much of this.
There is some good data on Bob Shiller’s web page, like this:
I will try to figure out a way to get this in front of him and then report back if he reacts. I am obscure, so no guarantees.
I saw you give a talk at the Chicago Booth Business School very near the top of the tech bubble. I can’t recall exactly but I am pretty confident it was after begin-1999 and before the top.
What I loved in real time about your call was that you had a very nice objectively-discernible definition of a “bubble.” A bubble does not exist when you or I think the price is too high, based on the Shiller CAPE, Tobin’s Q or whatever. Rather, a bubble exists when the price is being set by investors relying on the greater fool theory, perceiving stocks to be overvalued for whatever reason but expecting them to become more overvalued.
As I recall, your test for the presence of greater-fool price setting was the observation of a gap between fund managers’ perception of “value” and their forecasts for short-term returns, which presumably influenced their investing behavior.
You reported that people viewed the S&P as heavily overvalued and yet likely to rise further. And you mentioned that this same phenomenon could be found in the NASDAQ and particularly in the tech index. I think maybe there was even a pattern where the more subjectively overvalued indexes were expected to rise most in the short-term.
I loved the talk, even though I was not sure you were right. What was great was that you had defined the murky concept of a “bubble” such that it could be objectively measured, leaving aside whether your definition was correct. I like when words mean something. In financial market commentary, that hurdle is not always cleared.
I love how the sell side circle the last observation, as if we might not read left to right.
So my question for you, good Doctor, is whether we are back there again. I see that Merrill Lynch reports that a large plurality of investors see stocks as overvalued, although their time series falls two years short of going back to your presentation. (Perhaps your take inspired this measure?) And on your logic, we are not actually meant to take that contrarily. Rather, that particular observation is meant to be go with – i.e. to favor bearishness — if fund managers are meanwhile still bullish on short-run returns. You may correct me if I mistake you.
I ask this question in the form of a blog post, so that if I don’t get an answer then I have at least shared your framework, as I understand it. But if you do answer, please be aware that I plan to share.
Thank you for reading this, if you have. 😉
PS: I enjoyed the story Michael Lewis tells of your not enjoying the mathematical approach but wanting to get involved anyway! It looks like you managed to scratch out a path.