Robert Shiller: Unlike 1929 This Time Everything - Stocks, Bonds And Housing - Is Overvalued

Tyler Durden's picture

Robert Shiller is a professor of economics and finance at Yale University. He is the author of Irrational Exuberance, which in 2000 predicted the collapse of the tech bubble and is now in its third edition. He was awarded the Nobel Prize in Economic Sciences in 2013 for his work on asset prices and financial market behavior.

In the attached interview he observes that the recent equity run-up seems to be driven more by fear than by exuberance, as a lack of confidence in the future prompts investors to save more and thereby bid up asset prices.

Below is an interview he gave to Goldman Sachs' Allison Nathan

Allison Nathan: Are US stocks overvalued today?

Robert Shiller: I think that compared with history, US stocks are overvalued. One way to assess this is by looking at the CAPE (cyclically adjusted P/E) ratio that I created with John Campbell, now at Harvard, 25 years ago. The ratio is defined as the real stock price (using the S&P Composite Stock Price Index deflated by the CPI) divided by the ten-year average of real earnings per share. We have found this ratio to be a good predictor of subsequent stock market returns, especially over the long run. The CAPE ratio has recently been around 27, which is quite high by US historical standards. The only other times it has been that high or higher were in 1929, 2000, and 2007—all moments before market crashes.

But the CAPE ratio is not the only metric I watch. In my book Irrational Exuberance (3rd Ed., Princeton 2015) I discuss several metrics that help judge what's going on in the market. These include my stock market confidence indices. One of the indicators in that series is based on a single question that I have asked individual and institutional investors over the years along the lines of, "Do you think the stock market is overvalued, undervalued, or about right?" Lately, what I call "valuation confidence" captured by this question has been on a downward trend, and for individual investors recently reached its lowest point since the stock market peak in 2000. The fact that people don't believe in the valuation of the market is a source of concern and might be a symptom of a bubble, though I don't know that we have enough data to prove it is a bubble. In general, I try to get a sense of investors' excitement and anxieties through these kinds of measures and even by just reading the news. You might say that's very unscientific, but I do what I can to understand the state of mind of investors, which I think is very important in understanding market moves.

Allison Nathan: Wharton professor Jeremy Siegel argues that using S&P 500 earnings data for the CAPE ratio inflates it. What is your response to this?

Robert Shiller: Jeremy Siegel's 2013 paper that makes this argument does say that the CAPE ratio is useful. He just wants to make an improved CAPE ratio. And he proposes an alternative based on National Income and Product Account (NIPA) earnings, which he says yields a CAPE ratio that has predicted returns better, at least over the time period for which he has these earnings data. I think it is an interesting paper. But I am not ready to endorse the switch to NIPA earnings partly because they are conceptually a little different, valuing not just publicly traded stocks but also other companies. But the critical point he makes is that NIPA earnings—at least as of 2013—were higher than S&P 500 earnings, which made the market look less overvalued. Given that market valuations have continued to rise, I think that discussion has faded somewhat.

Allison Nathan: Is the equity market a bubble today?

Robert Shiller: I define a bubble as a social epidemic that involves extravagant expectations for the future. Today, there iscertainly a social and psychological phenomenon of people observing past price increases and thinking that they might keep going. So there is a bubble element to what we see. But I'm not sure that the current situation is a classic bubble because I'm not certain that most people have extravagant expectations. In fact, the current environment may be driven more by fear than by a sense of a new era. I detect a tinge of anxiety and insecurity now that is a factor in markets, which is quite different from other market booms historically.

Allison Nathan: How else does this period of apparent equity overvaluation compare to equity booms in the past?

Robert Shiller: This time around, bonds and, increasingly, real estate also look overvalued. This is different from other over-valuation periods such as 1929, when the stock market was very overvalued, but the bond and housing markets for the most part weren't. It's an interesting phenomenon.

Allison Nathan: What explains this phenomenon of asset valuations looking high across the board?

Robert Shiller: There are multiple answers to that question. But if I had to oversimplify with just one idea, it would be what I just alluded to a moment ago—that people are not confident in their future. They remember the financial crisis, and they worry. They hear about inequality through the Occupy Wall Street Movement and in many other places, and they worry where they will fall on the inequality spectrum in a decade or so. They observe the amazing but perhaps unsettling rise of information technology (IT), and they worry. As a result of all of this anxiety, they want to save more. But given the lack of options to invest in at a high return, they end up just bidding up the prices of existing assets. That, in turn, creates disappointment, more concern, and perhaps the feeling that they might be too late because of how much the market has already risen. But they still invest in it because of their anxieties.

Allison Nathan: What does this mean for market stability?

Robert Shiller: It means that the market could keep going up like this for some time. Its been an amazing run and looks like something that can't keep going indefinitely, but it might continue for several more years. So market bulls may be right that the market runs further. I think that could happen too. But I take a different view of the drivers of these runs; I tend to view them as more irrational. I just don't know when this bull market will end. And it might end very badly.

Allison Nathan: How concerned are you about a meaningful correction in the next six months to a year?

Robert Shiller: My concern has risen with the market. There could certainly be a correction in the next year. But the problem is that a correction might not come for five years. We just don't have any way to forecast when it will come.

Allison Nathan: Was it appropriate for Fed Chair Janet Yellen to express concern about equity valuations?

Robert Shiller: I think that there is a moral imperative for Fed leadership to express some opinion about the market. They have a staff of experts—a whole research army—to study these issues, and people look to the Fed as an authority. Believers in efficient markets would say that we shouldn't care about these opinions; that the market is smarter than any individual or any research team. But I disagree. I think that the market is not smart about these sorts of things and that we do need leadership from people who study these questions. And so I applaud Janet Yellen for making that statement, which helped put the current state of the market in perspective. One reason why the boom in the 1990s went on as long as it did is that Fed Chairman Alan Greenspan made very little of worries about the market. At one point he used the term "irrational exuberance," which led to a sharp drop in markets, but he never came back to that theme.

Allison Nathan: Of all the expensive asset classes today, which looks the most convincingly like a bubble?

Robert Shiller: The bond market looks the most unusual relative to history, with real US yields just off record lows of recent years. The difference, though, between the stock market and the bond market is that historically the bond market doesn't seem to crash like the stock market. Notably, if you go back to 1929, there was a huge crash in the stock market and not much action in the corporate bond market. That might come across as a surprise, but it's history. We are now in different times, though, with a very long run of very low interest rates that has affected many countries in the world. So there could be a big correction in the bond market. I'm not forecasting that because I don't like to forecast things that almost never happen. But it could happen. And that's the problem we face.

Allison Nathan: What should investors do when so many assets look expensive?

Robert Shiller: I am not an investment advisor. But I would say that the main implication for most people is that they should save more because their portfolio probably won't do as well as they imagined. And if they're saving for some distant goal like retirement, they might be disappointed. People have learned about the power of compound interest. But what they don't understand is that if interest rates are zero, you don't get any compound interest. I think that there is complacency among investors today. People have seen how well the stock market has done over the last century. But the market might not do so well the next time. So you have to consider whether you are saving enough.

And as a general principle, I think people should diversify across assets and geographies because there is no way to predict what any one asset will do with any accuracy. I've been talking down US stocks because of their high valuation, but I would invest something into US stocks; I would just put a heavier contribution in stocks around the world, where CAPE ratios look lower. I keep coming back to the theme that there are lots of places outside of the US to invest. And I would also own bonds, real estate and commodities. Commodities are overlooked by many investors but they are an important part of an investing portfolio.

The reality is that people are not very good at diversifying. This has been documented in studies. They tend to be distracted, and focus too much on one sector or one thing that they have heard. They also tend to focus on their own country. There's no reason why one should invest only in one's own country. Quite the contrary, some people make the extreme statement you should short your own country and invest only elsewhere. I wouldn't go to that extreme, but it is a plausible argument.

Allison Nathan: But is the strong US growth story relative to elsewhere enough to warrant buying US stocks?

Robert Shiller: The US looks pretty good and in some ways brilliant. The exciting news about technology seems to come largely from the US. For example, fracking, which is predominantly a US technology, transformed the energy market, and just within the last five years or so. And many electronics and IT advances are also coming from the US. So there is reason to believe in this country.

But I think that we also have to understand that we tend to be biased. One sees and appreciates one's own country; that's human nature that one has to correct for. Amazing things can happen elsewhere as well. You see that in much of the developing world; over the last half-century, there's been remarkable economic progress and growth. And we're going to see more and more advancement in those countries. So maybe the high US CAPE ratio is partly justified. But I think we have to nourish a healthy skepticism as investors and not get swayed too much by the idea that we're living in a new era here.


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Rock On Roger's picture

Gold and silver aren't overvalued.


Stack On

TungstenBars's picture

You are correct, but they will be outlawed. 


Plan accordingly. 

Ruffmuff's picture

Nope, make it so value has no value.... and there you are.

Funny Money's picture

The whole article boils down to one word: diversify.  No shit.

Amy G. Dala's picture

This whole interview boils down to my name is Robert Shiller, I have a Nobel Prize, I am on the Yale payroll forever, I had an index named after me.  Therefore, I am an expert.  I can predict the future, and you cannot.

If any single shaman with a crystal ball, whether it's a special crystal ball to predict the climate, or the price of an equity or a house, if they could start with something simple like predicting who will win the super bowl next year, I would be all in.

C'mon, Mister Shiller.  Not nearly as many variables in predicting next year's super bowl.  Should be easy for a team of "experts."  Hell, there's only what, 26 teams?  and half aren't realistic contenders.

bwh1214's picture

To keep the credit created boom alive took a stock bubble in the 90’s, took a stock and real-estate bubble in the 2000’s, now takes a stock, bond and real-estate bubble.

So we made it to where they were in 1929 in 2000.  We are going to find out what the crash looks like if the fed had kept the music playing for another 15 years in 1929.

Ham-bone's picture

Perhaps it because there's fewer of them with fewer jobs that generally pay less and they have more debt???


The reason WHY the Fed and CB's did what they and did since '08 needs better publicity.  Why they changed from marginal manipulation to outright "being the market" since '08...why the big change???  And once you understand the problem, you understand why the Fed's actions are criminal because they were never going to work or "help" the nation...only offer a small and shrinking cadre an opportunity to strip mine the nation on the way out.

It was a "flow" (not "stock") issue of new consumers that killed an already very flawed model.  The annual "flow" of new population growth in the US, EU, Japan, elsewhere all peaked in the '80's and annual new population growth began ebbing.  By 2008 in the US, the 25-54yr/old annual population change went negative.  The sliding #'s of new consumers had been hiden for years by lower interest rates, more available credit (subprime, etc.), longer duration credit.  But the '08 outright annual fall of the consumer base was too much. 

The Fed and CB's had to "suspend the free markets to save the free markets" (but what they really meant was they needed to suspend free markets because what a market would have done is found real pricing between lots of sellers and declining buyers).

Everything now is simply trying to hde the fact we have shrinking consumer bases and will for a decade...and maybe for the rest of our lifetimes.

I try to outline in the following links...all data from Fed's FRED...

Gobbler's picture
Gobbler (not verified) Ham-bone May 29, 2015 7:20 PM

The smart play is to go long on the dollar.  We're facing a deflationary nightmare.  When this thing pops, we might see a dollar for a gallon of gas.

MonetaryApostate's picture

We indebted some folks...  (Now there's no more hope)

r3phl0x's picture

Maybe for a month or two, but a large, sustained deflation is basically unpossible with a modern fiat currency. The govt & banksters always print, spend and loan as fast as they can without triggering runaway commodity price inflation. Any deflationary pressure just allows them to print even moar even faster. They will ensure that the finale is inflationary.

knukles's picture

Hold it hold it hold it.
Stawlks and houses went down in '29', etc.  Bonditos rallied (until the Fed tightened!!!!!!!! and then did so again!!!!!!!!)

Now, I'd expect sorta the same results this time if the floor drops out from under us but WTF, growth is 1.5% if you fuck with the numbers like La Vaginaora ......

MansaMusa's picture

I've come to the conclusion that if you plan on staying in America long term, then skip gold and sliver and buy other assets that the average American relates to (food, guns, liquor, used cars...).

Who will you sell gold and silver to?  Americans have been brainwashed beyond repair, they're more interested in debts not precious metals. Gov't will ban gold and silver so your best bet is to invest in things that can be bartered.

Now if you plan to get the he'll outta dodge when shtf, then stack PMS all day and prepare for the worst!


r3phl0x's picture

Hoard TP and booze and stuff too, but if you want to save, say, $100k for 20 years portably, with zero counterparty or systemic risk, PMs are still by far the best option..

stant's picture

Can't hoard booze and read zh too. I've tried. My next move is to do like my great grand father , and grand father did, make my own

essence's picture

The question is TungstenBars 18:30)  Gold being "outlawed" as you put it   ---  regionally or worldwide?

Most all posters on ZeroHedge view the world thru U.S. centric glasses. How provincial.

Last night I was reading (Dutch based) KoosJansen painfully detailed analysis about gold holdings in China (it about put me to sleep).
Bottom line .... gold appears to be well distributed between public & private holdings. Will gov of China attempt to screw its citizens so committed to holding gold?  Doubtful.

As for the U.S., who cares, (likely it couldn't participate in a Gold based trade system because it squandered what it once had).
Remember Nixon's infamous Sunday night speech "I am temporarily suspending gold convertibility" HaHaHa, what a crock of shit "temporarily" seems to have stretched to 45 years.

Perhaps the world remembers being screwed by the U.S. then and has festering resentment toward the ensuing fiat USD diarrhea that continues to this day. The fiat dollar isn't backed by the productivity of citizens, rather it is backed by force, (i.e. by death).

Increasingly, the tail no longer wags the dog and the U.S. appears destined to it's own private Idaho.

Atomizer's picture

Rock on Roger, you once held gold & silver until it was lost in a boating accident. Winks. 

Sweet Cheeks's picture


I understand your pain.  Hubster told me NOT to the PM (Precious Metals) out in the Jon boat. Did I listen?  Hubby is so wise. 

Panafrican Funktron Robot's picture

"using the S&P Composite Stock Price Index deflated by the CPI"

So, based on bullshit government statistics then?

Consider the actual CPI.

Or even better, compare the S&P to the monetary base, because that reflects the actual value as expressed in USD.

How soon we forget just how many dollars were created.  All dollar denominated assets (houses, cars, stocks, bonds, hamburgers, tampons) are going to eventually catch up to reality (even gold), in spite of attempts to artificially suppress or hide that reality.   

Lordflin's picture

Yeah I am worried...

I worry that I live in an age where the things that are forced under the rocks when the light shines clearly have crawled into the open and now dominate the high places.

I worry that the worlds unwashed masses have come to believe they have a claim on my future, and that I am the impediment that stands between them and their dreams.

I worry that the bulk of my countrymen have been dragged into the gutter where they wallow amongst the vermin, diseased and sick of mind and gorged on toxins.

I worry that at a time when my family requires me to be strong I find myself in a body increasingly worn from use, and I will admit it, at times misuse... as time has ravaged my youth, leaving me with wisdom and heart, but fagging endurance.

And I worry that the moon calf lunacy of madmen will be the only remembered legacy passed on from my generation to my children...

stormsailor's picture

i wish some of the cerebral members would opine on this as it has troubled me increasingly for years........................

stormsailor's picture

beautifully written and well said. that same thought floated through my head when i was running my 5 mile about an hour ago, it had a mind tripping video quality as well but i'm trying to fight the ravages of time as best i can.

somewhere in there i was doubting my own rationality because of the irrationality i see everywhere i look.

i'm old,educated,intelligent and would like to think i have accumulated some wisdom over the years but that is like faith due to the lack of evidence.

i was comforted by the words of an old priest after 50 years of service to god, he said there are only 2 things i am sure of in all my years, there is a god and i am not him.

Atomizer's picture

Robert Shiller is clinging onto his Nobel Prize in Economic Sciences. 

Shock and Awe's picture
Shock and Awe (not verified) May 29, 2015 5:44 PM

What if everybody in USSA was a capitalist pig speculator? When would we reach the top?

DOGGONE's picture

Start with this history, and SHOW it.
THEN talk!

Panic Mode's picture

"It's an interesting phenomenon."

Yes, we are interstingly fucked.

stormsailor's picture

i remember reading that in an ancient chinese proverb by cum chin,  may you be interestingly fucked

Mini-Me's picture

I find it ironic that his only explicit mention of the Fed was that they need to exhibit leadership and voice their opinions.  Baloney.  They flap their gums all damn day, and most of it is a pack of lies.

Shiller needs to pull his head out of his ass and call a spade a spade.  The world is in this mess because of excessive debt.  And we have excessive debt because the central banks punish savings and incentivize spending.  

Nothing changes for the better until central banking is discredited and abolished.

Sweet Cheeks's picture

New Mini-Me,

Exactly right.  If not for the brilliant (not) economists/bankers at the FED, we would have taken our meds and be healthy now.  

Amy G. Dala's picture

Ha ha, the fed has a "moral imperative" to express their "opinion" on the markets, because they have a "staff of experts."

Experts, experts everywhere.  Middle east experts who didn't see the Arab Spring.  Climatology experts who explain away the weather.  Computer science experts and their trading algorithms.

Shiller, Bernanke, Krugman, experts all.  Seems like the common denominator among "experts" today is tenure at an ivy league school.  The credentialled elite cannot be touched by mere mortals.  After all, they are the experts.

q99x2's picture

Arrest Shiller and his neck for teaching at a school of New World Orderism.

Wahooo's picture

Even opinions.

Fun Facts's picture

Shiller's paycheck is overvalued.

JustUsChickensHere's picture

Do not worry ,... it's value is being QE'd away

reader2010's picture

People just prefer MOAR! Is that simple, Professor Shiller?

buzzsaw99's picture

don't go out on a limb there bobby. :snark:

Pancho Villa's picture

Asset prices are above historical norms because the average age is increasing. In general, net worth peaks around retirement age. The baby boomers are nearing retirement age or have just recently retired, which is creating an unprecedented demand for investment assets causing their prices to soar. The baby boom peaked in 1957. Add 65 years to arrive in 2022. If this theory is correct, the late 2020's are going to be very interesting. And not in a pleasant way.

Atomizer's picture

Al Gore said our Security was stored in a lockbox.

just-a-girl's picture

Asset prices will continue to rise if interest rates continue to fall.  

Secondly, it is not appropriate to judge whether asset prices are over valued as compared to historical norms when interest rates appear headed for never before in history negative levels. 


N2OJoe's picture

I learned this the hard way and that's why it's easy to discount people on both sides who talk as "experts." Reversion to the norm is only a certainty when there still is a norm.

Yes stawks will drop many times in the coming months/years. Will this cause a panic crash? Maybe, maybe not. If FED keeps pumping fiat into the market, they could well become the sole owner of all that paper with no drop at all as everyone else gets out.

The farce can always get more farce-y.

Rock On Roger's picture

The value of assets hasn't changed.


The means of measuring that value has been diluted.

CHC's picture
CHC (not verified) May 29, 2015 6:56 PM

Maybe when the stock market CRASHES and we end up in a DEPRESSION, we can just call it: "It's an interesting phenomenon"

Rektors's picture

Save yourself from this insanity...Buy Bitcoins & Silver Maple Leafs.

fremannx's picture

Shiller knows it's the largest credit (debt) bubble in history. It is bursting and the coming deflationary collapse will dwarf 1929...

venturen's picture

they didn't print worthless paper in 1929(in the USA...I think they did in Germany)....all is good....welcome ZimbAMERICA! We have reached PEAK STUPITY!  Was he getting paid $200k to speak at Goldman Sach? When the pitchforks and catapults come that is the first place that should go! 

teutonicate's picture
teutonicate (not verified) May 29, 2015 7:38 PM

The problem with this article is that the case it makes for everything being overvalued is based on the fact that all the valuations are always quoted in nominal US dollars (or other fiat currencies) - the vastly overvalued items that are not discussed in this article.  With the amount of money that has been printed via CB debt monetization approaching the astronomical - the primary risk now is that we move from minor deflation into dramatic currency devaluation - in an attempt to devalue the outstanding debt. When denominated in the future value of fiat currencies, these tangible assets do not look as expensive.

People are valuing tangible assets based on the anticipated collapse in the value of the dollar and all other fiat currencies - which will happen, but on a timetable that is difficult to predict.

When this happens the value of all tangibles in nominal fiat currencies will rise dramatically (it may already have begun).  However, smart investors know that when this does happen it may be difficult to get on the train – so they stay on their preferred train(s) before they leave the station.

In this current situation, the best “train to be on” right now is precious metals, despite the fact that they do not earn any yield, because they are still the only tangible assets that are relatively depressed in price - and the only ones that are relatively independent of country-specific politics.   The <3% return you currently get on bonds and stocks will look like a pittance if things get rough for fiat.

You have to be patient though, because we don't know exactly when the acceleration in fiat devaluation will occur.  The fact that we have been systematically lied to by governments about that actual inflation that is occuring as we speak is evidence that they are aware of this issue, and are trying to preserve "money illusion" in the minds of the public as long as possible.

Under this secenario, it is most important to anticipate the "real", as opposed to "nominal" future value of the train that you are on.  For example, stocks may not crash in nominal terms, but if the currency they are denominated in becomes dramatically less valuable, they may crash in real terms.   It is for this reason that I think that PM's are the best train to be on at this point - since they may actually appreciate in real terms as investors flock to them as the last undervalued safe haven.

Bobbo's picture

I wonder if the sense that these assetts are overvalued comes from observing the internal workings of these things, or does it instead come from the fact that compared to my actual purchasing power they seem to be accelerating out of my reach.  Inflation these past years has NOT been trivial, and so a house or a gold bar or two seem costly to the average earner. 

But on the other hand, I recognize the problem with a 50x P/E, too.  Considering that risk/reward of 50x P/E or whatever it might be, I also wonder if that corresponds in some way to a generous 2% 30yr Tr.  So, rewards these days, for the bulk of the population who have at least a tad of money to use, are hard to find in the markets.

But (again) if you've already got the assetts (including, you've got the politicians and the overseers obeying your needs), then lo and behold there are fabulous profits right at hand.  Algos for example.  Central bank owners.  Black Budget Breakaway Civilization Techie Spooks tapping into the wires with quantum computers.  And others.

At least I think I see quite well that the markets are no longer markets, they are Midway con games replete with all the shills and barkers and other low-life hirelings one finds in that line of work.  There is no winning at the pre-set risk/reward levels that have been given to us.  "Rigged," "Manipulated," "Fixed," are simply inadequate to capture the enormity of it.

How long can we last?

..... or maybe I just don't know wtf izzup.

Prober's picture
Prober (not verified) teutonicate May 29, 2015 9:06 PM

No matter what your age, you will die of old age before the USD "collapses" - the regime has many many many more tricks in its bag to keep the party going for much much much longer.