I like Professor Shiller and respect his work. Really, I do, but... Massive bubbles, the sort of the proportion of the 2008 crisis, are nigh impossible to miss if you can add single digits successfully and are able to keep your eyes open for a few minutes at a time. Yes, I truly do feel its that simple. I saw the property bubble over a year in advance, cashed out and came back in shorting - all for a very profitable round trip. Was I a genius soothsayer? Well, maybe in my own mind, but the reality of the situation is I was simply paying attention. Let's recap:
- The housing market crash in the spring of 2006 and publicly in September of 2007:Correction, and further thoughts on the topic [31] and How Far Will US Home Prices Drop? [32]
- Home builders falling and their grossly misleading use of off balance sheet structures to conceal excessive debt in November of 2007 (not a single sell side analyst that we know of made mention of this very material point in the industry): Lennar, Voodoo Accounting & Other Things of Mystery and Myth [33]!
- The collapse of Bear Stearns in January 2008 (2 months before Bear Stearns fell, while trading in the $100s and still had buy ratings and investment grade AA or better from the ratings agencies): Is this the Breaking of the Bear? [34]
We all know what happened after this part. Well, 5 years later, before we even ran off the effects of the last crash, things are looking bubblicious again and again very few are facing facts. Reuters/CNBC reports "Nobel Prize Winner Says Housing Market Looking A Little Bubbly [35]":
Robert Shiller, who shared the 8 million Swedish crown ($1.25 million) prize with fellow laureates Eugene Fama and Lars Peter Hansen, said the U.S. Federal Reserve's economic stimulus and growing market speculation were creating a "bubbly" property boom.
You think so?!
The Royal Swedish Academy of Sciences lauded the economists' research on the prices of stocks, bonds and other assets, saying "mispricing of assets may contribute to financial crises and, as the recent global recession illustrates, such crises can damage the overall economy."
This was the case in the collapse of the U.S. housing market, which helped trigger the 2008-2009 global financial crisis. Markets are at risk of committing the same error now, Shiller told Reuters after learning he had won the Nobel prize.
"This financial crisis that we've been going through in the last five years has been one that seems to reveal the failure to understand price movements," Shiller said.
Bubbles are created when investors fail to recognize when rising asset prices become detached from underlying fundamentals.
Shiller and other economists warn that prices in some markets have risen too far, too fast due to the Fed's ultra-easy monetary policy. The benchmark U.S. Standard & Poor's 500 index hit a record in September, though it is generally not considered overvalued based on expectations for corporate earnings results or economic growth.
Shiller's work led him to suggest in 2005 that the U.S. housing market might be overheating. He helped create a closely watched gauge of housing prices, the S&P Case/Shiller Index.
In June this year, he pointed to a potential new housing bubble in some of America's largest cities.
"It is up 12 percent in the last year. This is a very rapid price increase right now, and I believe that it is accelerated somewhat by the Fed's policy," he said.
China, Brazil, India, Australia, Norway and Belgium, among other countries, were witnessing similar price rises. "There are so many countries that are looking bubbly," he said.
The Fed has held U.S. interest rates near zero since late 2008 and almost quadrupled its balance sheet to around $3.7 trillion through a campaign of bond buying, or quantitative easing, to hold down long term borrowing costs.
Bloomberg TV & Reggie Middleton on the Flawed Case Shiller Index: "That's what they said in Japan about 12 years ago, look where they are now!"
Previous opinions on the topic...
Is There A Bubble In The Canadian Condo Market? We Drill Down Into The Facts To Find Out [36]
The Canadian condo market is running into a precarious over-supply situation with large inventories slated to be entering the market in 2014 and 2015. Major centers such as Vancouver, Montreal and Toronto are witnessing a rapid pace of condo construction, despite falling sales....
[37]
Bernanke's Bluffing Because A True QE Pullback Will Cause Fundamentals To Reassert In Banking Sector [38]
A little over two years ago I queried "Is Another Banking Crisis Inevitable? [39]". This post attracted the attention of certain ING executives who apparently were asking themsevles the same question. I was invited as the keynote speaker at their valuation conference in Amsterdam wherein I dropped the negative reality bomb! Interest rates were GUARANTEED to spike and when they do, those banks with fictitious bank sheet values and business models predicated upon credit bubble metrics were GUARANTEED to start collapsing.
[40]
It's not just the European banks either. In 2009 I queried "Why Doesn't the Media Take a Truly Independent, Unbiased Look at the Big Banks in the US? [41]". Then there's real esate in both the US... CNBC's Fast Money Discussing Hopium in Real Estate [42]...
[43]
hat visual relationship is corroborated by running the statistical correlations...
[44]
Reggie Middleton ON CNBC's Fast Money Discussing Hopium in Real Estate [42]
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Crain's New York illustrating Reggie's BoomBustBlog [45] and the followup article in Crains illustrating his accuracy in calling real estate and the European debt debacle [46],"“His work is so detailed, so accurate, it's among the best in the world,” says Eric Sprott, CEO of Sprott Asset Management, a Toronto firm that manages about $5 billion and subscribes to Mr. Middleton's research. |