Outlok: Dow at 36,000?

IT'S OFFICIAL. Wall Street is definitely heading for a terrible fall. Anyone who doubts this should read the latest "global strategy" bulletin from Barton Biggs, Morgan Stanley's grand old man of stock market punditry. His own view of US stock markets is actually a relatively measured one, but he cites a worryingly naive example of one which is not.

At a recent west-coast conference for technology and Internet glitterati it was argued, apparently quite seriously, that the Dow, far from being overvalued, is in fact grossly undervalued. According to a couple of academics who are just about to publish a book on the matter, the Dow should be at 36,000, or roughly three times the present level.

This, by the way, is not some kind of long-term forecast, but where the proponents of this theory believe the Dow should be right here, right now. If ever there was proof positive that American investors, brimming over with Internet-inspired optimism and confidence, have taken leave of their senses, this is it. When apparently respectable voices begin to argue this kind of clap-trap, you know it's all over.

The argument is so exquisitely ridiculous that it is worth repeating. To get to this level, the market needs to reach an earnings multiple of more than 100 times. This is justified on the basis that we live in a new economy in which the old rules don't apply. As a consequence, there should be no so-called "risk premium" priced into equities, or, put another way, the return on equities should be as low as, if not lower than, that on bonds. During the course of the bull market of the 1990s, the risk premium of equities to Treasuries in the US has already more than halved. So why should it not fall to zero?

The answer, of course, is that it has never done so before, despite a a series of technological revolutions down the ages that were in the scale of things of probably rather greater significance than the present one. To argue that the risk premium should fall to zero is therefore also to argue that history is bunk.

The whole contention is powerfully reminiscent of Nomura, which only months before the Tokyo stock market bubble burst at the end of the 1980s, placed advertisements in the press explaining why the market would double again. As long as Americans and their maniacally day-trading spouses continue to believe that stocks only go up, the market will carry on rising. But make sure you are not standing in the way when the scales finally fall from their eyes, and they decide to sell. The tragedy of it is that if Wall Street goes, it will take our own relatively cheap London market with it.

Start your day with The Independent, sign up for daily news emails
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Sales Assistant / Buyer

£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

Recruitment Genius: Compliance Manager

£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

Day In a Page

Greece says 'No': A night of huge celebrations in Athens as voters decisively back Tsipras and his anti-austerity stance in historic referendum

Greece referendum

Greeks say 'No' to austerity and plunge Europe into crisis
Ten years after the 7/7 terror attacks, is Britain an altered state?

7/7 bombings anniversary

Ten years after the terror attacks, is Britain an altered state?
Beautiful evening dresses are some of the loveliest Donatella has created

Versace haute couture review

Beautiful evening dresses are some of the loveliest Donatella has ever created
No hope and no jobs, so Gaza's young risk their lives, climb the fence and run for it

No hope and no jobs in Gaza

So the young risk their lives and run for it
Fashion apps: Retailers roll together shopping and social networking for mobile customers

Fashion apps

Retailers roll together shopping and social networking for mobile customers
The Greek referendum exposes a gaping hole at the heart of the European Union – its distinct lack of any genuine popular legitimacy

Gaping hole at the heart of the European Union

Treatment of Greece has shown up a lack of genuine legitimacy
Number of young homeless in Britain 'more than three times the official figures'

'Everything changed when I went to the hostel'

Number of young homeless people in Britain is 'more than three times the official figures'
Compton Cricket Club

Compton Cricket Club

Portraits of LA cricketers from notorious suburb to be displayed in London
London now the global money-laundering centre for the drug trade, says crime expert

Wlecome to London, drug money-laundering centre for the world

'Mexico is its heart and London is its head'
The Buddhist temple minutes from Centre Court that helps a winner keep on winning

The Buddhist temple minutes from Centre Court

It helps a winner keep on winning
Is this the future of flying: battery-powered planes made of plastic, and without flight decks?

Is this the future of flying?

Battery-powered planes made of plastic, and without flight decks
Isis are barbarians – but the Caliphate is a dream at the heart of all Muslim traditions

Isis are barbarians

but the Caliphate is an ancient Muslim ideal
The Brink's-Mat curse strikes again: three tons of stolen gold that brought only grief

Curse of Brink's Mat strikes again

Death of John 'Goldfinger' Palmer the latest killing related to 1983 heist
Greece debt crisis: 'The ministers talk to us about miracles' – why Greeks are cynical ahead of the bailout referendum

'The ministers talk to us about miracles'

Why Greeks are cynical ahead of the bailout referendum
Call of the wild: How science is learning to decode the way animals communicate

Call of the wild

How science is learning to decode the way animals communicate