Robert Shiller: Expert on Market Bubbles Weighs in on Housing, Stocks and Bonds

March 29, 2013

Why is renowned Yale economist, Robert Shiller, who predicted the bursting of the tech and housing bubbles, now calling the bond market “dangerous”? Financial Thought Leader and visionary Robert Shiller shares his views and advice on the stock, bond and housing markets.

[bliptv id=”iIdDg5C5QQA”] WEALTHTRACK Episode #940; Originally Broadcast on March 29, 2013

Listen to the audio only version here:
Robert Shiller

In his latest book, Finance and the Good Society, Yale professor and economist Robert Shiller advocates for more financial innovation and more financial products. He explains why in this weeks WebEXTRA.

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Guest Info

Robert Shiller

Sterling Professor of Economics, Yale University
Professor of Finance, Yale School of Management
Author, Irrational Exuberance

Newsletter

Consuelo MackIt’s been a memorable week. The Standard & Poor’s 500 finally broke through its six-year-old former high and set a new record. Not by much! Today’s peak was 1569.19, less than four points higher than the old record of 1565.15, set on October 9th, 2007.

It was a fitting end to an impressive quarter, which saw the Dow also finish at a new record of 14578.54. The S&P 500 is up 10% year-to-date, the Dow up 11%. This week’s guest, renowned Yale economist Robert Shiller, will put these gains in perspective.

He will also discuss how uncertainties can weigh on the economy, markets and investor confidence. The current list is long: the sequester here, the banking meltdown in EU member Cypress, which threatened to turn into a full blown European crisis, political turmoil in Italy, military maneuvers by China, the U.S. and South Korea and some investment flight to quality, which sent U.S. Treasury prices higher and yields lower.

Amidst all of these rumblings, there is one sea of calm. It is a rare occasion in life that investors are given any degree of certainty for an extended period of time.  But such has been the case since late 2008 when the Federal Reserve lowered its key short-term interest rate, the Federal Fund’s rate, to a record low. Since then the Fed has reiterated, over and over again, that it intends to keep short term interest rates “exceptionally low”, at zero to one quarter of a percent “at least as long as the unemployment rate remains above 6-1/2%” and inflation is projected to be “no more than a half percentage point above the Fed’s 2% longer-run goal.” The Fed is also continuing its program of buying mortgage-backed securities at a pace of $40 billion a month and longer-term treasury securities at a pace of $45 billion a month to keep long-term interest rates from rising.

As top ranked economic research firm ISI Group told clients recently, “Fed policy is probably now the most stimulative it’s been in this cycle… and the stimulus is becoming more potent because it’s operating on a much improved economy…”

How much has the economy improved? Just look at what’s happening in the housing market. After plummeting from their recent peaks in 2005, housing starts and permits to build homes have taken off in recent months. The widely followed S&P/ Case-Shiller U.S. National Home Price Index rose 7.3% percent last year. Then there’s the sluggish job market. While still high, the nation’s unemployment rate has fallen from 10% in October of 2009 to well below 8% now. Meanwhile the stock market has more than doubled from its March 2009 lows, setting new records along the way.

Our guest this week, Financial Thought Leader Robert Shiller tracks all of these trends and more. Shiller is the Sterling Professor of Economics at Yale University and Professor of Finance at the Yale School of Management. He is an expert on behavioral finance and market risk, the author of numerous books including his most recent, Finance and the Good Society and two editions of Irrational Exuberance, the first published in 2000, warning of the tech bubble, and the second published in 2005, raising the alarm about the housing bubble. Shiller is a financial innovator. He is the co-creator of the widely followed S&P 500/ Case-Shiller Home Price Indices. He is the creator of the “cyclically adjusted price earnings ratio”, better known as CAPE. Many investment pros believe it is a far more accurate gauge of the stock market’s value than the traditional price-earnings ratio.  Last year Shiller and Barclays joined forces and launched a family of CAPE indexes designed to offer investors stock market exposure with a value focus.

Shiller will explain why his research shows the stock market is overvalued, bonds are “dangerous” and the housing recovery might not last. He will also talk about how he has changed his finance course at Yale over the years to reflect his belief that financial institutions are a cornerstone of our civilization and are essential to its ongoing success. Much food for thought!

I hope you have a happy Easter weekend and will make the week ahead a profitable and a productive one!

Best regards,

Consuelo

P.S. You can take two of Shiller’s financial courses at Yale, for free, at Open Yale Courses.Mathews Asia

Action Point

As far as inflation beating returns, preserving your purchasing power, U.S. stocks beat U.S. government bonds hands down.

 

One Investment

SHILLER: LOW CAPE RATIO

Financial Select Sector SPDR (XLF)

Price: $18.16 on 3/27/13

52-week range: $13.30 – $18.48

“One example would be the SPDR Select Sector Financials Index, ETF, and that has a ticker of XLF. It just puts you into a broadly diversified portfolio of financial stocks, and it has a very low CAPE and a very low price relative to 10-year average earnings. Now, you might say I’m afraid to do that because, hey, we just hit them with the Dodd-Frank bill, and all these regulations are coming over. Dodd-Frank said we’re going to end “too big to fail”, and so are they pulling the rug out from under their government support? Well, they’ve already done that, though, and that’s two, three years ago. I don’t think “too big to fail” is dead, either. I hope that it shouldn’t be a factor but still probably is. So you know, I’m kind of betting on history repeating itself.

Now, it’s been a big theme in my teaching at Yale and in books I’ve written that finance is a fundamental technology that drives our modern civilization, and it’s not about making money. I tell my students going into finance is about being a productive member of society, not about getting rich, and if you get rich, you should give it away. That’s what I tell them. I don’t know if they’ll do that, but I think finance is very important to our economy. It is beaten down right now. This is a time to go in.”

– Robert Shiller

 

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