Cliff Asness: prediction

Transcript context

…Sure. If your standard, like mine, is a bubble is something where you can’t really come up with a plausible scenario where this investment might work out, it’s proof by contradiction. We just ended it. I think it’s an expensive asset. I think equities are actually shockingly similarly expensive. I think people focus on bonds for a bunch of reasons. They focus on bonds because the yields seem much more measurable. I think equity valuations, things like Shiller’s CAPE and many other measures, are actually about as good for forecasting equity returns as bond yields are long term forecasting bonds. I think the last 20, 30 years, equities look better versus bonds than they have in a while, but that’s because the tech bubble dominates a lot of the last 20, 30 years. Over the last 100 years, we actually find we’re picking on bonds. We’re nervous because multiple asset classes look not bubble‑ish, but pretty darn expensive at the same time. That’s what worries me. That also leads into, if a lot of the world, be they institutions that need formal forecasts of what they’re going to make in their portfolio — or my dad. My dad is planning his retirement, 20, 30 years ago. Always had the same sheet of paper. He never showed it to me, but it was, how much do I need to retire? I’m pretty sure it was off by a factor of 10. I don’t know which direction it was off on. My dad was a trial lawyer. It skips a generation. He’s not a math guy. But I’m sure he had, how much I need to live on, what I think I can make on my money. The number that fell out was how much he needed to retire. People still do that. Institutions do it very formally. They make forecasts of what they’re going to make in their portfolio. I’m sure there’s a lot of my dads out there. They probably use a spreadsheet now. If they’re using anything like history and if we’re right that high prices on both stocks and bonds lead to lower than normal returns, it doesn’t have to be a bubble. We don’t need to see a crash. We don’t need to see a fix. But, they’re using too high of an assumption. It’s a problem going forward, and it makes the whole retirement problem a bigger problem. We’re going to come back to finance, but there’s a segment of these conversations always where we do overrated and underrated. So I toss out something, and you give me a short answer. Is it overrated or underrated?…

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