Illusions of gains
Here's what Robert Shiller wrote a month ago about the recent stock market gains:
In the US, two illusions have been important recently in financial markets. One is the carefully nurtured perception that President-elect Donald Trump is a business genius who can apply his deal-making skills to make America great again.
The other is a naturally occurring illusion: the proximity of Dow 20,000. The Dow Jones Industrial Average has been above 19,000 since November, and countless news stories have focused on its flirtation with the 20,000 barrier - which might be crossed by the time this commentary is published. Whatever happens, Dow 20,000 will still have a psychological impact on markets.
....
But these numbers are illusory. The US has a policy of overall inflation. The US Federal Reserve has set an inflation “objective” of 2% in terms of the personal consumption expenditure deflator. This means all prices should tend to go up by about 2% per year, or 22% per decade.
The Dow is up only 19% in real (inflation-adjusted) terms since 2000. A 19% increase in 17 years is underwhelming, and the national home price index that Case and I created is still 16% below its 2006 peak in real terms. But hardly anyone focuses on these inflation-corrected numbers.
https://www.theguardian.com/business/2017/jan/19/trump-us-markets-illusion-dow-jones
Real productivity is growing slowly and the problem is masked by financial markets. For example, building a $20B wall on the Mexican border will add to the GDP and increase commodity prices, but it will not contribute to long-term productivity growth.
In the US, two illusions have been important recently in financial markets. One is the carefully nurtured perception that President-elect Donald Trump is a business genius who can apply his deal-making skills to make America great again.
The other is a naturally occurring illusion: the proximity of Dow 20,000. The Dow Jones Industrial Average has been above 19,000 since November, and countless news stories have focused on its flirtation with the 20,000 barrier - which might be crossed by the time this commentary is published. Whatever happens, Dow 20,000 will still have a psychological impact on markets.
....
But these numbers are illusory. The US has a policy of overall inflation. The US Federal Reserve has set an inflation “objective” of 2% in terms of the personal consumption expenditure deflator. This means all prices should tend to go up by about 2% per year, or 22% per decade.
The Dow is up only 19% in real (inflation-adjusted) terms since 2000. A 19% increase in 17 years is underwhelming, and the national home price index that Case and I created is still 16% below its 2006 peak in real terms. But hardly anyone focuses on these inflation-corrected numbers.
https://www.theguardian.com/business/2017/jan/19/trump-us-markets-illusion-dow-jones
Real productivity is growing slowly and the problem is masked by financial markets. For example, building a $20B wall on the Mexican border will add to the GDP and increase commodity prices, but it will not contribute to long-term productivity growth.