Glassman Stocks have returned an annual average of more than 11% for the past 70 years. And, in fact, really for the past 200 years. I think that's enormously important for people to understand. It is a tremendous return compared with the alternative, bonds.

We say emphatically that stocks are undervalued today and that people could hold them and feel comfortable. You can use different assumptions and get a 55,000 Dow, but we are very comfortable with 36,000. And, in fact, most people don't have enough stocks in their portfolio.

You say exactly the opposite. You say people ought to dump the stocks that are in their portfolio because we are headed for a terrible crash, which is something you have been saying now for four years.

Shiller I didn't say "terrible crash." That is one plausible scenario, but other plausible scenarios are that [the Dow] will go up for a while and then just kind of hover for many years and give a low return. My book uses a 10-year horizon, which is viewed as the really long term. Ten to 20 years, it looks like we will have poor runs, maybe in the negative for 20 years—there is a good chance of that. In periods of high P/Es [price-to-earnings ratios, a measure of how expensive stocks are], stocks have done poorly subsequently. Your argument is that people have learned something and that historical data are no longer relevant. But that is what the historical data say.

Hassett There is no question that if you run through history, Bob is right—that over some periods following peaks in the P/E, there were some bad times. My problem with that exercise is that if you took anything, any metric of how the market is doing, and calculated the average over time, then, of course, when you are above it, then you go down, and when you are below it, you go up.

Shiller Not necessarily, not with the P/E ratio. You are suggesting there is some spurious—some fallacy in that. There isn't a fallacy here. I look at past historical periods when we had similar leveling, and you know, what comes to mind is 1929. We have had a tripling of the stock market to a record high level in the past five years, and there is only one other time when that has happened, which was '24 to '29. So history doesn't encourage me to think people have suddenly learned something.

Glassman I just think people should know that in 1990 the Dow was at 2,600. In 1995 it [finished] at 5,100. Now, if you are Bob, you would say, "Whoa, we are about to have another crash like 1929." What has it done since the end of 1995? We are now, as we sit here, above 11,000 [the Dow closed at 10,609 last week], so I don't think it is predictive to say simply that if the Dow triples, it is going to crash. In the past 18 years, the Dow has risen by a factor of 14. What we're saying is that something profound is going on.

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