Tags: shiller | stock | rally

Shiller: Why the Rally? Good Feelings

By    |   Tuesday, 01 Sep 2009 11:26 AM

The rise in global economic confidence might seem strange, given the financial problems that remain and new ones apparently on the horizon.

But Yale University economist Robert Shiller says something called a “positive feedback loop” explains the improved sentiment.

“Economic analysts often turn to indicators like employment, housing starts or retail sales as causes of a recovery, when in fact they are merely symptoms,” Shiller writes in The New York Times.

So what are the causes? “Look beyond the traditional economic links and think of the world economy as driven by social epidemics, contagion of ideas and huge feedback loops that gradually change world views,” Shiller says.

“A downward movement in stock prices, for example, generates chatter and media response, and reminds people of longstanding pessimistic stories and theories.”

That serves to push the market down further.

“At some point, of course, the process must end, as when the market falls so low that it becomes enticing, or when new stories emerge,” Shiller writes.

“Similarly, an upward movement in stock prices generates its own upward feedback.”

That’s what is happening now, he says.

Of course, some presently see the tide turning back the other way.

“The people who know are getting out (of stocks) early,” Art Cashin of UBS tells The New York Times.

“This rally’s a little long in the tooth.”

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The rise in global economic confidence might seem strange, given the financial problems that remain and new ones apparently on the horizon.But Yale University economist Robert Shiller says something called a “positive feedback loop” explains the improved sentiment....
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2009-26-01
Tuesday, 01 Sep 2009 11:26 AM
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