Why was Shiller wrong? In an arithmetic sense, we can point to three factors, each of which can take roughly one-third the credit for real American stock returns of 6% per year over the past decade rather than zero:
- 2% per year because the acceleration of productivity growth produced by the high-tech revolutions behind the very real "new economy" has made American companies much more productive.
- 2% per year because of shifts in the distribution of income away from labor and toward capital that have boosted corporate profits as a share of production.
- 2% per year because the argument of Glasman and Hassett in Dow 36000 turned out to be only nineteen-twentieths wrong: they argued that increasing risk tolerance on the part of stock market investors would raise long-run price-earnings ratios by 400%; it actually appears that increasing risk tolerance has raised long-run price-earnings ratios by 20% or so.
I will note that Brad gave great investment advice that has since returned better than 40% at the beginning of this year, and I wish I'd put more money in that asset. Some macro-economic trends are both obvious, and easy to place bets on.