Tags: Shiller | stock | market | bubble

Nobel-Winning Yale Economist Shiller: Stock Market 'Has Bubble Elements to It'

By    |   Thursday, 12 December 2013 12:35 PM

The stock market's torrid rally has some froth to it, but not an extreme amount, says Nobel laureate economist Robert Shiller of Yale University.

The Standard & Poor's 500 Index has jumped 167 percent from its March 2009 low and has generated a total return of 27.4 percent so far this year.

"It has bubble elements to it, because people see the market going up, and they're regretting the fact that they didn't buy in several years ago. They are tempted back into it," Shiller told PBS NewsHour.

Editor’s Note:
5 Reasons Stocks Will Collapse . . .

"But it isn't the really strong bubble that we saw before, because there are so many clouds. There are so many issues on people's minds that it doesn't look like the chance of a lifetime now."

Shiller's cyclically adjusted price-earnings (CAPE) ratio, which takes into account the last 10 years of earnings, now stands at 25.3. It hit a record of 44 in 1999, before the technology stock bubble burst, and has a historical average of 16.5.

"It can keep going up," he explained. "It's not a clear signal yet. It could go up to 35 easily."

So it's not necessarily time to exit stocks, he added. "It's time to be worried, but it's not necessarily time to bail out," Shiller said, noting that he has about 50 percent of his own money in equities.

"I don't think it necessarily means that I'm a model for everyone. I'm someone who is older [67], and young people can take greater risks. I'm not advising them to, but it's natural that they might."

Shiller stressed the lack of certainty in making forecasts about the economy. "We just went through the biggest housing bubble in U.S. history. It's off the charts. And now it's starting to go up again. What to make of that?" he asked.

"I mean, are we going back into another bubble economy? I don't know. I don't see how anybody knows that."

Shiller discussed institutional forces that prevent the Federal Reserve from acknowledging the existence of bubbles.

In 2005, during the housing boom, he searched the Fed's website for papers mentioning a "housing bubble." He finally found one and contacted the author.

"I said, 'You're at the Federal Reserve board. You had worries about the housing bubble. Why didn't you go for it and say strongly we might be in a housing bubble?'" Shiller said.

"And he kind of hemmed and hawed, and didn't seem to want to answer me." In retrospect, the reason for the gentleman's reticence was obvious, Shiller noted.

"You're working as an economist at the Federal Reserve board, you can't say that. It would be attributed to your higher-ups. . . . And the Fed chairman is so careful about everything. The Fed chairman is not going to say 'housing bubble.'"

Morgan Housel of The Motley Fool noted several problems of trying to identify bubbles.

"Even if a bubble is spotted, it's hard to know what to do about it," he wrote in USA Today.

"Most bubble spotters aren't content just avoiding them, and they try to bet against them. But that can be more dangerous than falling for them. A lot of smart people lost fortunes shorting tech stocks in the 1990s."

Editor’s Note: 5 Reasons Stocks Will Collapse . . .

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The stock market's torrid rally has some froth to it, but not an extreme amount, says Nobel laureate economist Robert Shiller of Yale University.
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2013-35-12
Thursday, 12 December 2013 12:35 PM
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