The Delusion Of Perpetual Motion; Bob Shiller Warns "I'm Definitely Concerned"

Tyler Durden's picture

"I am definitely concerned. When was [the cyclically adjusted P/E ratio or CAPE] higher than it is now? I can tell you: 1929, 2000 and 2007;" warned Bob Shiller this week, adding that "it's likely to turn down again, just like it did the last two times."

As John Hussman explains,

The central thesis among investors at present is that they are “forced” to hold stocks, given the alternative of zero short-term interest rates and long-term interest rates well below the level of recent decades (though yields were regularly at or below current levels prior to the 1960s, which didn’t stop equities from being regularly priced to achieve long-term returns well above 10% annually). The corollary is that investors seem to believe that as long as interest rates are held near zero, stocks will continue to advance at a positive or even average or above-average rate.

It’s certainly true that from a psychological standpoint, the Federal Reserve has induced the same sort of yield-seeking speculation that drove investors into mortgage securities (in hopes of a “pickup” over depressed Treasury-bill yields), fueled the housing bubble, and resulted in the deepest economic and financial collapse since the Great Depression. This yield-seeking has clearly been a factor in encouraging investors to forget everything they ever learned from finance, history, or even two successive 50% market plunges in little more than a decade.

But the finance of all of this – the relationship between prices, valuations and subsequent investment returns – hasn’t been altered at all. As the price investors pay for a given stream of future cash flows increases, the long-term rate of return that they will achieve on their investment declines. Zero short-term interest rates may “justify” the purchase of stocks at higher valuations so that stocks promise equally dismal future returns. But once stocks reach that point, investors should understand that those dismal future returns will still arrive.

Let me say that again. The Federal Reserve’s promise to hold safe interest rates at zero for a very long period of time has not created a perpetual motion machine for stocks. No – it has simply created an environment where investors have felt forced to speculate, to the point where stocks are now also priced to deliver zero total returns for a very long period of time. Put simply, we are already here.


The ratio of non-financial equity market capitalization to GDP (which has maintained a tight correlation with subsequent 10-year S&P 500 total returns even in recent times) is now about 134%, compared with a pre-bubble norm of 55%.

The median price/revenue ratio S&P 500 components easily exceeds, and the average rivals, the levels observed at the 2000 peak.

All of this suggests that investors may not appreciate the extent of present overvaluation, lulled once again by the assumption that cyclically-elevated earnings are permanent. Benjamin Graham warned long ago that this assumption is probably the chief source of losses to investors:

The purchasers view the good current earnings as equivalent to ‘earning power’ and assume that prosperity is equivalent to safety.

Meanwhile, Fed Governor James Bullard observed last week that even the Fed is not inclined to maintain zero interest rate policy indefinitely: “Investors should be listening to the Committee. Of course, you can do what you want.”


Stock valuations now reflect not only the absence of any interest-competitive component of expected returns, but the absence of any expected compensation for the greater risk of stocks, which is not insignificant – as investors might remember from 2000-2002 and 2007-2009 plunges, despite aggressive easing by the Federal Reserve throughout both episodes. We expect the compensation for taking equity risk to be negative over the coming 7-year horizon. Market crashes are always and everywhere a reflection of an abrupt upward shift in the risk premiums demanded by investors, and that piece of investor psychology is less under Fed control than investors seem to believe. We expect many years of poor market returns, but we don’t know the precise path the market will take to arrive at nowhere. We aren’t forecasting or relying on a crash, but we certainly have no basis to rule out that possibility – particularly if we observe any upward pressure at all in risk-premiums on corporate and junk debt, or any material breakdown in market internals from here.

Investment decisions driven primarily by the question “What other choice do I have?” are likely to prove regrettable. What we now have is a market that has been driven to one of the four most extreme points of overvaluation in history. We know how three of them ended.

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Eireann go Brach's picture

Blah blah who gives a fuck, the Fed is the only game in town, buy the dip or get labelled a terrorist!

max2205's picture

Monday would be a great day to flash rebound either

Caviar Emptor's picture

News flash: market can't crash when cronies borrow at 0% and give themselves a payday when their stock options sky. Market won't crash when in reality it is being used as a revolving credit machine for corporations : issue stock, buy it back, borrow more based on your 'market cap' so you can roll over your debt, use stock as collateral and borrow more to make up for shortfalls in revenue etc.

As long as it is fully backed by the Fed's printers, no way it can crash.
Irony is the so called market becomes more illiquid by the day.
And Wall Street wolves have a harder time makin a living.

kliguy38's picture

Your premise is that it can't crash even though the wolves can't make a living with an illiquid market???? Just watch what the wolves do to your premise that the market can't crash. WHO do you think the Fed is????? hehehehe.....The wolves ARE the Fed.... and they WILL crash this pig...and when they do crash it they'll say again No one could have seen this coming just to keep you thinking they aren't the wolves.

Savyindallas's picture

But who could have possibly thought housing would crash in 2008? EVERYONE (except for a few nuts like Peter Schiff) thought housing prices couyd increase 10%-15%  each year-forever. Like Bud paulsen ,I still can't figure that one out  -one of the great flukes and mysteries of our time.

seek's picture

Monday - Thursday would be a great time for an extended meltdown since they could work on the "solution" over the long weekend.

Remember when the crash comes, as it did in 2008, it's something that happens over the span of a couple weeks with a few extremely bad days sprinkled in. It's not a one-day (or even one-hour) event.

BraveSirRobin's picture

If you like you stock valuations, you can keep your stock valuations. No one is going to take that away from you... period!

Wahooo's picture

I will kindly pay you Tuesday...

TabakLover's picture

Crash before July 4th? No way. Now, Monday 7/7, hmmmmmmmmmmmm.

dreadnaught's picture

S'fynny when Iceland let the Banks crash and burn -there was no "Rioting in the streets" and they have recovered nicely

Traderone's picture

Cool name but why change it from 'go bragh' to ' go Brach'? Because you used a Capital B then maybe Brach is your actual name?

e_goldstein's picture

Market, what the fuck is that?

Jumbotron's picture

Actually.....BTFATH.....because today's all time high is tomorrow morning's dip.

Here is another symbol that represents perpetual motion......


Jumbotron's picture

What's stupid?  My advice?   The ouroborus?  It's called sarcasm.

TBT or not TBT's picture

Still, what other investment choices do we have?   Financial tyranny will become more and more severe as central planning freaks circle the wagons around their perks and power.   PM will be confiscated or anyway taxed.  Price controls and.rationing and confiscatory taxes on profits and windfalls are to be expected.  Even in bartertown.  

SMC's picture

Invest in yourself.

Acquire productive assets and know how to use, maintain, and repair them.

Never forget the first law. The law of the Jungle.

Headbanger's picture

I'm getting there.  I just hand fit a new bolt in one of my SKS rifles with hand files and a magnifying glass and it shoots real good now!

Now if I could only reload steel case Berdan primer ammo with hand tools too...  Nahhh..

Oldwood's picture

Ammo prices are down, Picked up 2500 rounds yesterday at the gun show, 9mm brass case at $269/thousand.

Investing is about diversity.


huggy_in_london's picture

Well, the tone on ZH in the last few months has turned, and as such I suspect its the top or very near the top here.  I can't recall seeing so many readers resigned to having to buy or be long.  Surely thats a strong sign.

As for Hussman, as much as I like his stuff, he is a pussy.  He bangs on about stuff being grossly overvalued but isn't "forecasting or relying on a crash".  Come on dude, put your balls on the would strengthen your arguement cause you will look like a twit if it does crash and you were half-assed calling it.  

Oldwood's picture

The chaos is intensifying. we all have theories about what and when but we also know we don't know anything for sure. That's the whole point of chaos. If the signs were clear, we would have already taken action and likely the worst would have been over by now. Rules of economics mean nothing now. No fundamental, no fact means shit because the government can changes the rules tomorrow. We all want to feel smart but it is completely another thing to put you nads on the line.

Gromit's picture

My entry point is 2000 S & P and 10 VIX and I'll place my bets.

world_debt_slave's picture

zirp, nirp, hypothocation, etc. , what choices?

ToNYC's picture

What good is money if it don't fuel savers with a reward for wasting away with the stuff?

caShOnlY's picture

I noticed this "YAK" about interest rates.  They seem to telegraphing rates going up in 2015.   Odd that they start jawboning hard as they DXY approaches the the "Magic 80".

scubapro's picture



after the 1930's an entire generation was burned and did nto buy stocks, put their money in banks or trust anyone they didnt have a personal referral to.  these last two  plunges have only trained the upper middle class that 'what comes down, always goes back '.   

which, to my eye, given that its 70 years and 'time' again, that the third time is the charm.  even if its a mere 50%--- but really after 40% down they will say, 'you know, we fell this far and then it went back up, so lets do as baml says and just ride it out, maybe move a little CD money in while it still low'...only to see -70% and sht their pants.

utter capitulation.   then, are we running to mama's teet of fascism, or self regulated local militias?

rum_runner's picture

Great question.. Obviously we don't know but also the answer is going to be all sorts of different across the country.  Some parts of the Repbulic will remain.. New England thinks like a bloc and is home to a lot of Federal folks (or at least they were schooled here) so I expect it will stay united.  As to huge areas along the gulf and in the southern corridor.  No clue.

moneybots's picture

"Meanwhile, Fed Governor James Bullard observed last week that even the Fed is not inclined to maintain zero interest rate policy indefinitely: “Investors should be listening to the Committee. Of course, you can do what you want.”"


THAT IS PRETTY FUNNY.  The FED said it was inclined to SUPPRESS interest rates for an indefinite period of time.  The FED even backtracked after Yellen said she thought rates would go up about 3 months after the end of QE, pushing back any expectatoin that rates would go up.

In fact, various people don't even believe the FED will stop QE, because they view the FED as a bunch of monetary cowards.  So why should anyone listen to a committee that constantly cuts and runs to more QE?

RaceToTheBottom's picture

There is no free lunch....

Eventually, someone pays the bill.

TabakLover's picture

If the MSM shills start running stories about how bad -3x efts are............get ready.

Aussiekiwi's picture

Pay your debts off while Interest rates are low.

Don't accumulate more debt,

Don't buy a new car, keep the one you have providing anticipated maintenance costs are not going to kill you, if you need another car buy a low mileage older car that has a reputation for reliability and one you can do your own services on, if you open the bonnet and you can't see the plugs because of all the crap on top of the engine don't buy it. If you don't know how to service your vehicle, its probably on youtube step by step.

Only buy what you need, its not a bargain to buy something you don't need just because its 50% off.

Learn to cook, rather than buy heat and eat meals, there are a lot of Internet sites that can tell you how to cook nutritious meals for a fraction of your current cost, amazingly in the old days people used basic ingredients to create meals, you can do that as well. Cut down on meat, alcohol and give the nicotine addiction up, the Government takes way too much tax on that, maybe look at home brew.

Simplify, always simplify your life, look at cutting your energy bills with solar etc.



Enceladus's picture

Learning to cook is great advice.

However, I would encourage the leveraging of your assets not a reduction of debt. 'Do as they do not as they say' Think, if you accumulate a debt for a house of 300k usd and the value of the dollar falls you could pay your debt in highly devalued money. And if you defualt for some reason thats somebody elses problem.


Thats how they do it

eishund's picture

I love alcohol, cocaine and all that stuff. I just don't like the after effects.

AdvancingTime's picture

Regardless of what you name it the "Federal Reserve Nightmare" or the "Yellen conundrum", the box Ben Bernanke made when he painted both himself and the Federal Reserve in a corner remains. Bernanke has by passing the chairmanship to Yellen escaped from the QE trap but left the rest of us fully in its grasp.

With a policy of loose and cheap money  and an inflation target of just 2% the Federal Reserve  continues to please those gambling that not fighting the Fed guarantees profits. As many Americans are forced to pay higher food, gasoline, and health insurance premiums, I wish someone would let the Fed know we are already there. Any thought that inflation is not higher has come from the false illusion brought from lower payments on things like auto loans and mortgages, this is a one off and will not continue. More on this subject in the article below.

Bemused Observer's picture

When you have so many people piling in to the only game in town, eventually the payouts aren't going to be worth the entry fee to play.

What happens when those exiting discover there IS nowhere else to go?

InanimateCarbonRod's picture

Recall that scene in Catch 22 where the nurses come in and change the IV bottles? Taking the one from the output to hanging it back onto the IV hanger?

Money flow, they call it...

AdvancingTime's picture

Much of the economic landscape is beginning to look like something out of  "Alice And The Looking Glass" A bizarre  and unrecognizable land, a land that is distorted and papered over by ream after ream of paper. This paper has been rolling off the printing presses of central banks all across the world in an attempt to mask reality.

Peter Schiff says, printing money is to the economy what taking drugs is to a drug addict. In the short term it makes the economy feel good, but in the long run it is much worse off. What was once the "long run" or "distant future" may be getting much closer. More on this in the article below.