The undoubted productivity gains and increasing international competitiveness achieved by many US corporations is also suspect as justification for such high valuations. A company's customers, not just its shareholders, will receive a significant proportion of these gains through lower prices and better service. That is how free enterprise and competition work. And, within the extended time scales that are implied by such valuation models, employees will demand, and get, a share of the proceeds as well. Meanwhile, if the New Era analysts are correct, share prices will still continue to increase, year after year, at double digit rates of growth.

Rather than attempting the probably futile exercise of even roughly estimating the timing of the next crash--it is in my opinion better to be out of most stocks altogether now--it is more useful to examine the reasons why markets became overvalued in the past, and look to see if the same or similar things are happening today. If we can find enough parallels, that is good evidence that the markets are indeed overvalued, rather than that things are, as we so often hear, "different this time".

The American business and investment environment in the years before 1929 was very much like todays. The underlying economy was doing extremely well. Profits were healthy. Industrial productivity was improving; much of which was to do with the benefits of new technology. Inflation was low. Interest rates were at historic lows. There was little unemployment.

The seeds of disaster lay in the booming economy and the low interest rates. As profits rose, so too of course did stock prices, to perfectly reasonable levels at first. At the same time, due to low interest rates, bonds and other interest bearing instruments became relatively less attractive. Stocks became more attractive. This effect snowballed into a widespread switching out of cash and interest bearing vehicles into real or financial assets, especially by people who had little investment experience and knowledge.

" A preference for investing in equities instead of bonds was fostered by a number of statistical studies, published in books and articles, which showed that almost always in the past, bonds have produced less income for the investor than had been (or could have been) produced by a diversified assortment of common stocks." This quotation is from Irving Fisher's "Booms and Depressions" published in 1932.

These purely financial effects, driven as they were by a perfectly reasonable desire on the part of investors to achieve better returns on their money, would presumably not have led to any major problems had there been a general understanding that equities were getting overvalued and thus the real risk of holding them was increasing. Such an understanding would have reduced the flow of money into the stock markets: risk averse investors would have gotten out and stayed out, and prices of stocks would have been self-limiting. Economics 101. Risk increases with the potential reward.

This didn't happen, largely because there came to be a widespread belief thatthe risk was not increasing. The idea that a "New Era" (that was the term used) of perpetual prosperity had arrived had been proposed and had taken widespread hold.

Once this idea had been accepted, there was no turning back. Like today, there was a wealth of optimistic investment advice; books on the stock markets and mutual funds became bestsellers; newspapers were full of optimistic advice; equity mutual funds became very popular (there were many such funds in 1929); cash positions of investors and investment funds were very low, and there was a historically high use of credit to buy stocks. The psychological effect of positive reinforcement also certainly became increasingly powerful. Stock valuations rose and rose until by 1929 they had reached extreme historic highs, though they were not as not as high as they are today.

A stock market crash in the USA is certain to be reflected in Canadian markets, the two economies are so closely linked.