Over the past several months, many leading economists and financial experts – even Federal Reserve Chair Janet Yellen – have concurred that there are various elements of the economy that are in a bubble or on the cusp of entering into the bubble phase. Some point to real estate while others cite technology.
Well, add Nobel laureate economist Robert Shiller to that list of bubble prognosticators.
Speaking in an interview with CNBC on Tuesday, Shiller listed the bond, housing and stock markets as transforming into overvalued niches and that these may appear to start looking a bit bubbly. Essentially, a lot of things in the market are getting just a bit too expensive for Shiller’s liking.
The Yale University economist, who co-founded the cyclically adjusted price-to-earnings (CAPE) ratio with economic colleague John Campbell, said CAPE is nearing its maximum limit. Upon further review of stocks, Shiller averred that stock prices have been substantially high over the past two decades.
“My price-earnings ratio has been above 20 for more of the last 20 years,” he said. “It’s at 26 now. So, it’s a little higher than the average for those years, but it’s been high for a long time. It’s not exactly a new alarm.”
Although the valuations are soaring, they could take a significant hit as the global economy is in the midst of instability and the Fed is tapering its monthly bond-buying program, otherwise known as quantitative easing.
The bond market, particularly Treasury Inflation-Protected Securities (TIRPs), is another area that Shiller believes is acting bubbly.
“We’ve had negative TIP rates recently, so what’s going on here? How can it be that 30-year TIPS were negative in 2012? How can it be that people think that we can get a return, a riskless return in real terms for 30 years? There’s something bizarre,” Shiller added. “That looks a little like a bubble, as well. So, the whole thing might correct down, both bonds and stocks.”
The real estate market, which has been slowly rebounding since the housing crash and subprime meltdown a few years ago, is getting too high as prices in some cities are up 25 percent since 2012 when the market bottomed out.
Bonds and stocks are highly priced and housing is reaching that point, too. According to Shiller, “it’s like everything, everything is pricey.”
“It might seem perverse, but worries about the future can actually cause asset markets to be priced highly,” Shiller stated. “I called it the life-preservers-on-the-Titanic theory. When the Titanic was going down, people would pay a fortune for anything that floats. I’m exaggerating, of course, but that might be the situation we’re in now.”
Last month, we reported that Yellen confirmed that she won’t begin to raise interest rates just so she can pop a few bubbles. The head of the Fed noted that she will only start to hike rates when the labor market is healthy and inflation hits two percent a year. At the same time, she acknowledged there were aspects of the market that are embarking upon bubble territory.
