Shiller Warns US Stock Market 'Trump Effect' "Is Based On Illusion"

Tyler Durden's picture

Authored by Robert Shiller, originally posted op-ed at The Guardian,

Speculative markets have always been vulnerable to illusion. But seeing the folly in markets provides no clear advantage in forecasting outcomes, because changes in the force of the illusion are difficult to predict.

In the US, two illusions have been important recently in financial markets.

One is the carefully nurtured perception that President-elect Donald Trump is a business genius who can apply his deal-making skills to make America great again.


The other is a naturally occurring illusion: the proximity of Dow 20,000. The Dow Jones Industrial Average has been above 19,000 since November, and countless news stories have focused on its flirtation with the 20,000 barrier – which might be crossed by the time this commentary is published. Whatever happens, Dow 20,000 will still have a psychological impact on markets.

Trump has never been clear and consistent about what he will do as president. Tax cuts are clearly on his agenda, and the stimulus could lead to higher asset prices. Lower corporate taxes are naturally supposed to lead to higher share prices, while cuts in personal income tax might lead to higher home prices (though possibly offset by other changes in the tax system).

But it is not just Trump’s proposed tax changes that plausibly affect market psychology. The US has never had a president like him. Not only is he an actor, like Ronald Reagan; he is also a motivational writer and speaker, a brand name in real estate, and a tough deal maker. If he ever reveals his financial information, or if his family is able to use his influence as president to improve its bottom line, he might even prove to be successful in business.

The closest we can come to Trump among former US presidents might be Calvin Coolidge, an extremely pro-business tax cutter. “The chief business of the American people is business,” Coolidge famously declared, while his treasury secretary, Andrew Mellon – one of America’s wealthiest men – advocated tax cuts for the rich, which would “trickle down” in benefits to the less fortunate.

The US economy during the Coolidge administration was very successful, but the boom ended badly in 1929, just after Coolidge stepped down, with the stock-market crash and the beginning of the Great Depression. During the 1930s, the 1920s were looked upon wistfully, but also as a time of fakery and cheating.

Of course, history is never destiny, and Coolidge is only one observation – hardly a solid basis for a forecast. Moreover, unlike Trump, both Coolidge and Mellon were levelheaded and temperate in their manner.

But add to the Trump effect all the attention paid to Dow 20,000, and we have the makings of a powerful illusion. On 10 November 2016, two days after Trump was elected, the Dow Jones average hit a new record high – and has since set 16 more daily records, all trumpeted by news media.

That sounds like important news for Trump. In fact, the Dow had already hit nine record highs before the election, when Hillary Clinton was projected to win. In nominal terms, the Dow is up 70% from its peak in January 2000. On 29 November 2016, it was announced that the S&P/CoreLogic/Case-Shiller national home Price index (which I co-founded with my esteemed former colleague Karl E Case, who died last July) reached a record high the previous September. The previous record was set more than 10 years earlier, in July 2006.

But these numbers are illusory. The US has a policy of overall inflation. The US Federal Reserve has set an inflation “objective” of 2% in terms of the personal consumption expenditure deflator. This means all prices should tend to go up by about 2% per year, or 22% per decade.

The Dow is up only 19% in real (inflation-adjusted) terms since 2000. A 19% increase in 17 years is underwhelming, and the national home price index that Case and I created is still 16% below its 2006 peak in real terms. But hardly anyone focuses on these inflation-corrected numbers.

The Fed, like the world’s other central banks, is steadily debasing the currency to create inflation. A Google Ngrams search of books shows that use of the term “inflation-targeting” began growing exponentially in the early 1990s, when the target was typically far below actual inflation.

The idea that we actually want moderate positive inflation – “price stability,” not zero inflation – appears to have started to take shape in policy circles around the time of the 1990-91 recession. Lawrence Summers argued that the public has an “irrational” resistance to the declining nominal wages that some would have to suffer in a zero-inflation regime.

Many people appear not to understand that inflation is a change in the units of measurement. Unfortunately, though the 2% inflation target is largely a feelgood policy, people tend to draw too much inspiration from it. Irving Fisher called this fixation on nominal price growth the “money illusion” in an eponymous 1928 book.

That doesn’t mean that we set new speculative-market records every day. Stock-price movements tend to approximate what economists call “random walks,” with prices reflecting small daily shocks that are about equally likely to be positive or negative.

And random walks tend to go through long periods when they are well below their previous peak; the chance of setting a record soon is negligible, given how far prices would have to rise. But once they do reach a new record high, prices are far more likely to set additional records – probably not on consecutive days, but within a short interval.

In the US, the combination of Trump and a succession of new asset-price records – call it Trump-squared – has been sustaining the illusion underpinning current market optimism. For those who are not too stressed from having taken extreme positions in the markets, it will be interesting (if not profitable) to observe how the illusion morphs into a new perception – one that implies very different levels for speculative markets.

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D Nyle's picture

Well it was from the Guardian=Fake News

Cognitive Dissonance's picture

ALL markets, and their movements, are illusions we choose, and wish to, believe are real.

The key to its believability are trading rules and regulations, charts and graphs, 'experts' passing judgement etc. Reality is defined by our parameters.


new game's picture

just confussing enough for the average person to not understand.

of course, intentional. are you smarter than an 8th grader?

inflation adjusted. lol

say again what inflation really is?

and what are the numbers?

for some odd reason, i'm not believing...

GGuy's picture
GGuy (not verified) new game Jan 23, 2017 9:47 AM


shamus001's picture

Inflation is THEFT- Outright.  Here's the most common example:

pre-1913:  Man buys new house for $5000, ten years later he sells it for $3500 (because a new similar house is worth $5000) = his old house depreciated, and thus in selling it, he has taken a loss of sorts (perhaps even if filing depreciated loss)

Post 1913:  Man buys new house for $100,000 ten years later he sells it for $120,000 ($120,000 has been inflated and now purchases what 85,000 did ten years ago) The man pays 40% capital gains tax on $20,000 the government claims is "profit" and applies the remaining $112,000 towards a new similar home which is worth 150,000


THE RUB?  You are taxed on DIRECT monetary figures that are DELIBERATELY INFLATED to represent GAIN, when adjusted for inflation are WORTH LESS than they were when the home was purchased.  YOU HAVE LOST MONEY, NOT PROFITED!


This applies to ALL sold assets.  They are all inflated in price so that the government can SCREW YOU by skimming a piece of YOUR LOSSES when selling!


shovelhead's picture

Who exactly are the retards that think these stock prices are any semblance of company value?

Is there anyone out there that really believes they're not playing that old Time Bomb Game where you toss around the bomb until it goes off and you're out of the game?

Everyone likes a hot table until they hear, "Seven out, all away".

amadeus39's picture

I know for a fact that Warren is still shopping. And that man knows a thing or two, because he's seen a thing or two million quadtrillion. Might even have seen a Google.


halcyon's picture

Shiller if of course right. As usual, markets have gotten ahead of themselves and discounted too much, too soon. It'll take 1.5 years for the new administratoin really to get going and for the decisions to start get traction in the economy. Until then, it's all markets doing guesswork discounting.

There'll be a nice 10-20% correction within the nexts 6-9 months.

Time to buy selectively then.


DOGGONE's picture

Show real price histories!
IMO, the main enabler of sizable asset price bubbles is keeping the real price histories rarely seen. See:
AND perhaps relevant: federal felonies include fraud, which includes false advertising, which includes deception by omission.

Delaware Dick's picture

Just because you don't understand it, that doesn't make it not true.

Chupacabra-322's picture

Stock market is based on Ponzi.

Cassandra.Hermes's picture

yes, when you spend $914 billion on share buybacks and dividends this year, or about 95 percent of earnings,

new game's picture

multiplier effect. best money financed-lol...

what could go wrong?

MFL5591's picture

No its not, it was created by the Federal Reserve to fake the people out and dump the market in Trumps lap. Sorry Schiller, we are not that stupid but, good try!

Caloot's picture

So if the markets crash tomorrow, it's Trumps fault.

gatorengineer's picture

because anything else woudl be raczist

Spitball's picture

Commence with the profit taking.

Pesky Labrador's picture

Blaming Trump for a stock market failure, like he had any control over that spaghetti ball. From the Bot report, it seems as though they are going to crash the system soon after Trump takes office then blame the crash on him. They need a fall guy and this just happens to be in their favor.

FreeShitter's picture

Correct. Puppets have no control over monetary policy. The fed will do as it pleases, unfortunately ameridumbs can never figure that part out.

Dg4884's picture

Going to be more than the market!  The bubbles have been preserved for this very occasion.

amadeus39's picture

Market timing is a bitch. Especially when the parameters are in milliseconds.


FreeShitter's picture

The dow is currently paced with the USND of almost 20T. So its based on CTRL-P. Keep inflating or die bitches,

Stan522's picture

Well, that's an asinine statement.... The stock market in general is based upon an illusion... 

amadeus39's picture

Wish I had been an invested part of that illusion for the past 8 years. Just saying...


g'kar's picture

Soooo...It wasn't an illusion for the last 8 years until Trump was elected then it became an illusion..okay

PTR's picture

It's the rally cry of the emerging alt-left conspiracy movement.


Shoe's on the other foot now.  Heh.

Dg4884's picture

The Trump effect is an illusion?  The whole fucking market is an illusion!

DirtySanchez's picture


Now how does the fucking idiot explain the last eight years!

Sofa King's picture

Interesting how his last name begins with Shill. Looks like bullshit is in his bloodline.

29.5 hours's picture

<<the 2% inflation target is largely a feelgood policy>>

Feel good for whom?  It means our savings are evaporating away at 0% interest. Savings / investment are not feeling so good.

MedicalQuack's picture

If you never watched the Quant documentary, there's some good stuff in there from Mike Osinski, who created the software used for the mortgage scam, "With software you can do something about everything, create all these little virtual worlds where people function, but what matters is the real world"...he's right as it took a virtual world of software and perception marketing that was fake and look what happened.  We know the story.

This is why nothing makes sense as there's a lot of quants and data scientists out there, not just limited to financial areas too, that are creating virtual worlds where some kind of algorithms are used to distort.  The real world will come back calling at some point in time though.  I call it operation perception deception.   There's nothing wrong with using algorithms and software to make us more efficient and we need that, but there's also a time to ask if we have stepped over the line to where we go beyond efficiency into fantasy too.  I hate the words artificial intelligence too, let's call it what it is, "algorithms".  AI was created just to market and dupe folks to believe in theories and methodologies that have indeed gone over the line and getting back to the real world gets to be very frustrating.

So what kind of virtual perceptions are being created about Trump and next question we might ponder to ask is if Trump has been impacted in which areas.  We all are affected in some way or another, but what's the view from the top I guess.  Trump made his money from the real world of real estate so we have some grounding there versus all the algo companies, Facebook, Google, etc. who didn't follow that method of working with tangibles very much.

new game's picture

they will do everything in their power to inflate. do or die situation.

or conspiracy bigtyme; crash and burn to destroy the conservative mantra.

sound principles are useless to psychopaths. they only get in the way of their agenda...

jamesmmu's picture

Even a few pts drop in DOW is so hard to sustain, people dont fucking care if its reality.

Rich Monk's picture

Behind all of these financial scams are the Jews. The Fed., Wall St., COMEX, derivatives, usury, fractional reserve banking, etc.....  Nothing more than the Jewish organized crime syndicate for the past 200 years! When you can create "money" from thin air, whether physical or digital into the Trillions of dollars than you can buy any congressman, Senator, and any legislation, from any government.

silverer's picture

Trump was dropped on the Titanic via helicopter after it hit the iceberg. Nobody can undo the damage that started to pile up starting about 1983. We all know that banks exist to fund the government, and that even with an 80% income tax levied on everyone in the US, the budget can't be balanced. I've watched the Youtube videos put up by credible accountants and mathematicians, and the evidence and conclusions that it can't go on are very real. We are absolutely facing danger from years of can-kicking. Obama's doing the Cloward Piven thing sealed the US' fate. The truth is, people with a backbone will get through it. I'm still happier it will land on Trump rather than the career criminal, pro-elite shill, anti-constitution Hillary, who would not let a "good crises go to waste". No doubt in a major monetary meltdown and the resultant civil disorder, the Democrats with Chuck Schumer would want to re-write the US Constitution. So for that at least, we can be happy that Trump is in, and pro-America, not pro Marxist, no matter what comes next.

jmack's picture

Next to obama, everyone is a business genius.

Stanley Lord's picture

What pisses me off about this line of thnking is it is "blame Trump"- the illusion was alive and well for eight years (plus) under Obama.

orangegeek's picture

yellen and the other CBs bidding this pig - yellen leave Feb 2018 - we could see this shit hold for another year.

Money_for_Nothing's picture

Shiller doesn't like Trump. Says so in a shrill voice. Has been a shill for decades. Quotes a lot of fake data. Shiller's main fear is that Trump will succeed. Then Shiller's sinecure will be threatened.

Grandad Grumps's picture

I would much rather have a strong economy, with increased money velocity, than an inflated stock market. Apparently the elitists think this another way.












Archive_file's picture

"Whitesnake concert?" Correction: "Great White."

I'm an old california stoner, I know these things.

esum's picture

95 million out of work..... what "economy" ... and inflation is not prosperity... buying power is

bring the jobs back, audit the fed and let the rest of the world adapt...

arrest soros for funding terrorism and riots and shut him down... what about his nazi war crimes... the high point of his evil existence...

bringing in "poor abused immigrants" wont fix the underlying world problems... it only fucks US taxpayers and benefits the globalists 

if the people instead of coming illegally to the usa revolted and corrected thier indiviual country's problems they would not have to come here....




TrustbutVerify's picture

Buying American build the U.S. based economy. It sounds stupid to say but 95% of American seems to ignore this truth.

Red Wire's picture

Hi all,

Here's a list of all my recent videos, so you can check out for yourself if I do any good or that it's a better idea not to quit my day job yet ;)

Sharing with friends is highly appreciated :)

Enjoy and feel free to ask questions if you have any!

How to protect yourself against rising interest rates? Part 1

Interest Rates on the Rise – Part 2

Apple Part 3 – Bearish Daily Candle Stick Pattern

Apple Part 2 - Elliott Wave, Cyclical Analysis and RSI

Apple – Part 1 - Pay attention to Key Area 120-135

Bitcoin 4h chart update – Break above $910, retest $1000 next?

Intraday Update Nasdaq vs DOW

Divergence Nasdaq vs DOW

Is the market about to top out and a 5% move to the downside should be expected?

Bitcoin - Currency of the future or the next Ponzi scheme?

CandleStick Weekly Chart – Hanging Man

Cyclical Model – JAN 15-25

Bullish and Bearish Divergence RSI -

Elliott Wave E up -

SirBarksAlot's picture

Mr. Shill-er operates from the perspective of Europe and Israel that all Americans are stupid.

Amy G. Dala's picture

I don't recall anybody anywhere voting for Trump because he's a "business genius."  Nobody gives a shit about the hotels and golf courses.  Everybody voted for a radical recalibration of priorities.

innertrader's picture

Shiller has been "warning us" about the stock market for about 12 years.... that I recall.  SOME YEAR, he willl finally be correct.  Meanwhile, I'd like to see his total actual stock investment results, on a monthly bases, for the last 7 years.  Does anyone have it???