Professor Robert Shiller, the economist who predicted the housing crisis, warns that the Japanese quake could unsettle stocks worldwide, setting markets up for a dramatic decline within days.
Stocks are likely to be volatile and investors might see “important drops” following the 8.9 magnitude temblor off the coast this past Friday and a subsequent tsunami. More than 10,000 are feared dead and officials are scrambling to contain damaged nuclear reactors in the area of the epicenter. Aftershocks continue as rescuers dug through rubble and bodies wash up on beaches.
As aid pours into Japan, investors are eyeing events nervously for signs that confidence might be shaken by the disaster. Moody’s, the ratings agency, said that the quake could push Japan to a tipping point in terms of its enormous, long-standing debt problems. The agency had Japan on Aa2 sovereign rating with a negative outlook before the quake hit.
“I would make a parallel to the last big earthquake in Japan, in Kobe, in 1995. There was a huge worldwide stock market drop a full week after that earthquake. That’s the kind of thing we have to worry about now,” Shiller told CNBC.
He suggested that the markets might react by this Friday, as week after the earthquake, as happened in 1995. “That would be too precise of a mirror of what happened in ’95, but it’s the kind of thing to watch out for,” Shiller said.
Shiller is a professor of economics at Yale University and chief economist at MacroMarkets and is co-author, with George Akerlof, of “Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism.” He also is co-creator of the S&P/Case-Shiller Home Price Indices, the widely followed measure of U.S. home prices.
Japan’s massive debt burden, now more than double the size of its economy, is part of the problem, Shiller says.
Stimulus from the energy and construction rebuilding effort to come might offset some of the economic problems, following the quake and the obvious immediate humanitarian need. But “I don’t know if it will offset all the negatives,” Shiller said.
As for the rest of the world, the Japanese disaster could be the kind of fundamental change in perspective that causes a stampede for the exits in risk assets.
“What happened in the United States, a week after the Kobe earthquake, is the Nikkei fell 5 percent in one day. Now, there wasn’t necessarily any connection to the Kobe earthquake,” Shiller says.
“What happened? I think it was the news stories, the stories of human failure, of mistakes, that the Japanese government couldn’t handle that earthquake. It kind of created a different emotional atmosphere. It brought up reassessments of our general, basic outlook,” Shiller says.
Stock prices today reflect what’s to come, Shiller says. “It prices the indefinite future. It’s very vulnerable to news stories that suggest new information and new emotions relating to that,” he says.
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