Shiller Warns: Stocks Are Partying Like Its 1929!

Tyler Durden's picture

Careful not send the investing into a panic, Robert Shiller appeared on CNBC this morning to explain just how insane the valuation levels of the market are currently...

And's Brett Arends lays out the details...

I hate to rain on this parade. But the latest lurch upwards in stock prices has just taken market valuations up into the skybox levels, according to the market timing measure with the longest pedigree on Wall Street. It’s just gone from flashing amber to flashing red - meaning, if it’s right, that there is now a significant and rising risk of a crash, and a bigger risk of simply very poor returns.

This has little to do with President-elect Donald Trump, by the way — and much more to do with President Ulysses S. Grant and all his successors.

Wall Street’s jump this week has taken the S&P 500  to an eye-watering 27.9 times the corporate earnings of the past 10 years. That’s according to data compiled by Yale finance professor Robert Shiller and some simple math.

This is about the same level that the market hit just before the crash of 1929, and is far higher than was seen in 2007, for example, or during the ill-fated boom of the late 1960s. The last time we saw the stock market this expensive on this measure was early in 2002 — just before stocks plummeted.

Comparing stock prices to earnings of the past 10 years, rather than just one year, is a metric known on Wall Street as the “cyclically-adjusted” price to earnings ratio, or CAPE. It is also known as the “Shiller” PE, after Yale’s Shiller, who won a Nobel prize for his research into it. His data shows it has been a strong indicator of future stock returns going back to 1871 and the days of President Grant.

Yes, CAPE has plenty of critics. Many people on Wall Street will tell you to ignore it, mainly, they say, because it’s been “wrong” for a long time. The CAPE has said stocks are overvalued since the mid-1990s, they point out. And yet shares keep going up.

Well, maybe. But as it happens a new research paper by two economists strikes a strong blow on behalf of the CAPE.

“Shiller’s PE: Market-Timing And Risk” by Valentin Dimitrov at Rutgers and Prem Jain at Georgetown shows that the biggest problem with the CAPE hasn’t been the metric itself — but the oversimplistic way investors have applied it.

In a nutshell: Investors shouldn’t flee stocks simply because the Shiller PE is above average. They shouldn’t flee stocks even when the Shiller PE is way above average. But history has said they should flee stocks when the Shiller PE is at extreme levels — like now.

Only when the CAPE is “higher than 27.6”, they conclude, has the stock market proven to be a really bad investment.

And, like I said, it just hit 27.9. According to Dimitrov and Jain, extremely high CAPEs like today have historically been followed by very high volatility, and really bad 10-year investment returns.

The difference between their analysis and the simplistic view of the CAPE is both real and meaningful.

As the authors note, most of the time even reasonably expensive stocks have been better investments than the alternatives, such as cash or bonds. Over the very long term stocks have handily outperformed other asset classes.

So, yes, history has said that the cheaper the CAPE when you invest in the stock market, the better your likely returns. People who invested when the CAPE was in single digits typically tripled their money or better over the next 10 years. People who invested when it was in the teens typically doubled their money or better. Even those who invested when the CAPE was in the low 20s typically made reasonable returns.

Only when the CAPE tops about 27.6 does it flash red, the authors calculate.

There are caveats. Permabull Jeremy Siegel, of the Wharton School of Business, argues that the usefulness of the CAPE has been weakened by accounting changes. And none of this relates to short-term, or even medium-term, trading. Early 1929 was actually a fantastic time to get into the US stock market — so long as you didn’t stick around. So were the late 1990s. Someone who sold their stocks in late 1996, when the CAPE hit 28, missed out on the biggest free-money bubble bonanza in recorded history. Veteran financial consultant Andrew Smithers, despite his prescient bearishness in 2000 and 2008, concluded that long-term investors should never hold about less than 60% of their portfolio in stocks.

Nonetheless, at this point history says you’d need another late 1990s dot-com-like mania to stay bullish. Over the past 150 years, it has generally been an extremely poor move to invest in U.S. stocks with the CAPE at these levels. But maybe this time is different, eh?

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TheRideNeverEnds's picture

Yea if you'd listened to this fool you'd have been out of the market 50% lower than current levels.

evoila's picture

he's tongue tied to explain it, and sounds like he might actually take a sip from the kool-aid. Giving up is usually the last stage before the bubble pops, after they've sucked everybody in. In this case, even Shiller. 

Draybin Deffercon III's picture
Draybin Deffercon III (not verified) evoila Dec 8, 2016 1:46 PM

"When teh shoe shine boy started recommending which altcoins to buy, I went and sold all of my altcoins."

~ Joseph Bittedy

mtl4's picture

Shiller's "sky is falling" index doesn't mean shit so for once the Wall St folks are dead right to be ignoring it.  Being a pure academic is yet another reason to ignore him along with Krugman, Summers and the rest of the ivory tower self annointed expert nut jobs.

Dr. Spin's picture

Yes, and when you run for the door, you might very well find it locked. Then you will be feeling the fire at your back.

I pity the poor fools that have to be in the market at this time. Ulcers should be the least of their worries.

I eschewed money in '99. Even back then, it tasted a lot like paper...


yogibear's picture

Go back in your academic cave Shiller. Stocks will keep going up for a while longer.
Wall Street boys want their monster year-end bonuses. Your warning is BS!

yogibear's picture

Shiller is a clown. Unlike 1929 we have the PPT and the Feds under the infinite fiat standard. It is truly different this time. Limited downside.

Party on all!

CorporateCongress's picture

So 27.6 is danger and 27.5 is fine. Haha indeed

wwzmach's picture

zero hedge has been bearish since it started in 2009 when the SP500 was at 660.... when ZH goes bullish that will be the signal to short.


yrad's picture

Shiller, spiller...

A broken clock is right twice a day..

Id fight Gandhi's picture

Central banks are at the center brazenly pumping it.

Nearly 8 years into the cycle.


Yeah it is different.

laomei's picture

This is a good thing. It honestly really is. I hope that it crashes under Yellen, then Bobomo shoulders all the blame.  This gives President Trump the power to do as he pleases.  Which means we get to deport all the illegals and close the borders to ALL immigration.


Enough time has passed, it's time to go back to Fascism, which is the system that Whites prosper under.

GRDguy's picture

Voting for Trump was kinda like voting for Lenin during the revolution.

Voting for Hillary would have been like voting for the Czar Nicholas.

Not too much of a choice there. We know how that turned out.

laomei's picture

You really have no idea what you are talking about.  Trump isn't a marxist piece of garbage.  By the end of 8 years we will be ready for full on fascism in this nation. Thank god.

divingengineer's picture

If this is democracy, please, give me fascism.

I don't think we'll ever see either of these quaint old notions again. 

TheVoicesInYourHead's picture

True dat.

This rally is super-long in the tooth.

pitz's picture

I think its actually worse than they imply.  A good chunk of the contemporary stock market is in firms that are highly leveraged to falling interest rates and increasing consumer consumption.  So not only are the 10-year averaged earnings (or "CAPE" as Shiller would call it) high, but the earnings themselves are inflated by the tail end of a long-term consumer credit bubble which has benefitted from falling interest rates, and excess returns to the financial sector.

Rising rates will, of course, decimate financial sector earnings, and destroy personal consumption domestically.  Thus the inevitable reversion and overshoot could easily knock the indices down to single-digit P/E ratios.  I'm not sure many are really prepared for this. 

Hammer823's picture

1/3 of the stock market's entire market cap comes from just 30 companies.

ZoroAustrian's picture

Don't worry, everyone's preparing: by buying financial and consumer stocks!  Because Trump, dontcha know.

wains's picture

Is it time to short Goldman?

Jus7tme's picture

I seem to recall that the very same Shiller decreed that everything was fine just a few months ago. So now there has been a 10% runup, and he is all frightened. The right time to start being frightened by the effects of QE and ZIRP was years ago.

Soul Glow's picture

You know that fat guy that bet his fund on a market crash, what's his name, Crispin Glover?  That dude is totally fucked.  This is madness though.  Glad I can watch from the sideline knowing that my wealth is in a coffee can in my closet in the form of bullion and not at the whim of Wall Street tweets about Jaime Dimon and Steve Mnuchin being put in charge of economic policy.

swampmanlives's picture

Have you made more money buying and selling gold than if you bough an S&P 500 fund at the same time and let the dividends reinvest?

Hammer823's picture

The reason stocks turned around on election night is because Central Banks and Institutions went on a buying spree in the futures to erase all the losses.  5% losses mind you, vanished into thin air.  Poof.

The stock market has to go up.  $30 Trillion of the economy is based on stock prices.  And stock prices are just arbitrary speculation about the future.  There is no "wrong" value for a stock.  It can be whatever institutions want it to be.

The stock market is rigged to go up.  Not one of these analysts or experts ever admits it.  But it absolutely is.


Clock Crasher's picture

Total Debt = 200 trillion

phyz cash in existence 99% smaller in size (1 trillion)

Hyper deflation on deck.. unless they print the difference then hyper inflation

pitz's picture

Thats my belief as well.  M3 must eventually converge with the actual physical currency supply as rates spike.  As credit dissappears with higher inflation.  So either M3 is going to crash, or physical currency is going to the moon.  Either way, it appears we're in for a period of monetary instability which does tend to favour gold historically.

wmbz's picture

Not like 1929, back then they had no clue what they were doing.

Today in modern times we have computers and stuff. Along with really, really smart people running/fleecing our "system" so nothing can go wrong you see.

Sit back and enjoy he ride to DOW 30,000 and beyond!

Hammer823's picture

Absolutely.  Today's stock market is integral for the success of the economy.  401k's didn't even exist in 1929.  Not to mention State and Federal budgets that directly depend on stock returns and the taxes collected from retirment plans.  2 trillion in Baby Boomer taxes is coming due.  There is no way the market crashes right when Uncle Sam is about to collect.

GRDguy's picture

RCA (Radio Corporation of America) was BIG in early 1929.

We have AAPL (Apple Inc.).  

Over 300+ largest financial institutions have it as their #1 holding.

Just sayin'.

Seasmoke's picture

However,The waiting will mind fuck you something awful.

Snaffew's picture

I hate to say it, but people have been saying this for years...these "markets" are absurd and insane, which is excatly why they could just as easily rise 20 percent from these levels as they could drop 20 percent.  So far, the only thing that has worked is the long trade...until it doesn't work anymore, it appears that is the only trade to make and I hate, hate, hate to say that.  A lot are starting to throw in the towel, but they can inflict mortal wounds very easily with all this exuberance.

DC Beastie Boy's picture

So who the fuck is going to sell?

That's right nobody. Where do you put the money if you do?

Overpriced residential real estate? Crashing commercial real estate? No yield bonds? The fucking NIRP banks? Soon to be outlawed cash?

To the moon


johnjkiii's picture

Two things: 1. hold yer nuts and breath and do nothing. It always gonna come back. 2. watch the cash & pick an early time to buy the inverse etfs. When the fit hits this shan, it will be in the -50% and even if tou're a little late in, you'll enjoy the big middle. 

mo mule's picture

Well 45 P Honda is a Asteriod that you will be able to see by Jan 1,17. low in the western skies. It will cross in front of earth Feb 20 or so and the earth will fly thru it's debri field soon after. We should get major CME's off the sun as fly's by maybe a EMP we should also get large meteriotes from the tail. Large earthquakes should precede it as it interacts with our sun in it's passing. 

mo mule's picture

Well 45 P Honda is a Asteriod that you will be able to see by Jan 1,17. low in the western skies. It will cross in front of earth Feb 20 or so and the earth will fly thru it's debri field soon after. We should get major CME's off the sun as fly's by maybe a EMP we should also get large meteriotes from the tail. Large earthquakes should precede it as it ineracts with our sun in it's passing. 

Txpl9421's picture

I feel bad for the suckers thinking they are going great riding this market to all time highs.  Its like thinking its a good idea to go out onto the beach collecting sea shells at this extra low tide.  Except its not low tide.

Cash Is King's picture

Simple enough! Start triimming your best performing assets b y 10% a year until this thing does implode. Based on the rediculous spike in the late 90's early 2000's you have about 8 years to go and by then you'll only have 20% of your portfolio in stocks!

Here's the real question. The markets crashed for Bush (jr.) and then again for Obama right? Will the same pattern hold for PE-Trump?


I hope Schiller isn't getting his talking points from

Graham Summers

JohnGaltUk's picture

When the big money is scared of the bond market...... where else can big money park.

DOW & S&P could double if the bond market collapses. Equities are liquid, gold can be confiscated on bank holidays or if you are in India at the moment they can turn up to your house and take it if you have too much and property can be taxed just because you own it. Try selling a property in a falling market like Vancouver at the moment and I hear Auckland is getting sticky and Oz is on the cliff.

The market has topped.

mrvco's picture

Run it up and pull the rug out once the retail investors are all in.

south40_dreams's picture

People are about to learn of the tyranny of numbers. The hard way.

DrBrown's picture

Shiller is just another academic knob!

alangreedspank's picture

Markets weren't in a bubble at all 3 months ago, but now 20% YTD is definitely a glaringly obvious bubble ? Right...

Ajax_USB_Port_Repair_Service_'s picture

I can feel the bulishness in this room.

Midnight Rider's picture

Nobody is selling (yet) because Trump has promised lower capital gains taxes next year.

swampmanlives's picture

I'd like to see the P/E ratio when all tech stocks are removed. Times are changing folks. New tech has us expecting more profit with the rise of big data. Looking to make money off how many shits someone makes a day is a possiblity that wasn't available 15 years ago.