> US stocks are way, way overvalued
> relative to their historical averages.
I guess my question earlier was: who says that a) "historical averages" are the only measure of future performance and that b) "value" appears anywhere in the (primary) equation? You could have made this statement five years ago and it would have been just as "valid" yet it would not have signalled the impending doom of a crash.
There's a bit of controversy about whether or not something "has changed" in the US equity markets, and I tend to think that something *has* happened: namely, the US Govt. has directed policy on several levels to encourage a disconnect between the market and 'value analysis' so as to increase the viability of the 'bubble' -- but I think it's because of this action that what is happening is not accurately referred to as a 'bubble' since it's unlikley to go away as fast as a normally constructed bubble might.
I see it more as a shifting out of Social Security and into an informally constructed revolving retirement fund. The only things that could stop it now are a) massive changes in tax policy or b) a significant decline in the production of new workers to add to the pool. Neither seems to be on the near-term horizon. Compare the complaints heard when FICA limits started their metoric rise in the 70's to news each year that the 401k limit has been bumped.
Eventually those who invested will begin to take out what they put in, but the portion of their "savings" that resulted from an increase in price will dwarf the portion actually "saved" and so small dips (like the mythical "10% crash/correction") mean nothing emotionally. Also, tax policy will limit lump-sum removals; people will draw what they need, slowly, and likley shift smoothly from growth to income.
So yes, I think there will be a backlash, but it's going to be a long time from now. Unless something goes horribly wrong with the plan, which it might. In that case, yes, we're all fucked. :-)
> And sooner or later, financial manias which aren't supported by a
> real economic boom (and for all the fireworks of the US stock
> market, real investment in America has pretty much stagnated
> throughout the 1990s, and growth rates have been miserable)
> come to a grievous end.
This is a nice doomsday scenario, but the boom-bust cycles have also been tamed. So don't look for 15% GDP growth anytime soon; such booms have been outlawed by the Fed (precisely because of their instability leading to exactly what you posit). The real "miracle" of the stock market in the 90's has been the shifting of the "burden" of things like employee compensation away from earnings pressure and onto the shoulders of fund managers and individual investors. The equation [revenue - costs = profit] has been modified so that 'costs' no longer includes the portion of compensation provided by stock options.
No one seems to have noticed that stock options have fueled a recovery in California's real estate market and economy as a whole, while GAAP have banished their impact from the bottom line. Realize that it's likely that Microsoft would show zero earnings if it had to account for stock options on its books.
Effectively "the market" is paying bonuses at Microsoft.
But back to 'real investment' -- as we shift out of manufacturing and into services, exactly what kind of 'investment' do you see as being something missing from the current phenomenon?
Is it just because we're not building factories?
There *is* investement going on, but it's mostly in the form of satelllite networks and long distance digital telephone fabric. All quite cheap in relative terms to say, a steel plant. So again I'm not sure if this comparisson to "historical averages" is valid.
/jordan