Although Yale put ol' Doc Shiller out to Emeritus pasture he still stops by the Cowles Foundation for Research in Economics where he, along with fellow Nobel Laureate William Nordhaus, are on the research staff.
We are fans.
From CFA Institute's Enterprising Investor blog, January 7, 2019:
Posted In: Behavioral Finance, Drivers of Value, Economics, Equity Investments, History & Geopolitics, Performance Measurement & Evaluation, Portfolio ManagementRobert J. Shiller has shown remarkable prescience over the years. In Irrational Exuberance, he successfully called the dot-com bubble. Less than 10 years later, in the run-up to the financial crisis, he issued similarly accurate warnings about the bloated housing market.
Of course, Shiller is known for more than just his forecasting abilities. The cyclically adjusted price earnings (CAPE) ratio, or the Shiller CAPE, has become a pillar of modern finance and grew out of research that earned him the 2013 Nobel Prize in economics.
It’s been almost two years since he last spoke with CFA Institute, and with talk of inverted yield curves, overvalued stock markets, and imminent recession, the present struck us as an opportune time to see what was on Shiller’s mind.
What follows is a lightly edited transcript of our discussion.
CFA Institute: You issued accurate irrational exuberance warnings before. Does anything worry you today?
Robert J. Shiller: Boy, that’s a big question. What I’ve emphasized recently is a housing market boom and also a stock market boom together. They both show signs of disruption right now, which is a little unusual as these two markets are not very correlated with each other historically.
We had the correction in the stock market from a peak at the beginning of 2000 until 2003, but then the housing market just continued to boom right through the whole thing. It’s a little difficult to speak of the two as two different aspects of the same phenomenon. I am struck though that we have seen since 2009 an extraordinary behavior of the US stock market. Since 2012, we see a pretty extraordinary behavior of the housing market. Also, of course, you add the bond market, which has recently showed some bubble‑like aspects as well.
Three simultaneous bubbles are certainly unprecedented. Of course, some say the term “bubble” itself is overused. Do you think there is a bubble in bubbles?
Popular usage terms come and go out of style. For example, the term “bubble” first appeared long ago in the early 1700s with what they called the “South Sea Bubble,” which was a stock market boom in Europe. The US didn’t even have a stock market that long ago. There was a bubble in bubbles when Charles Mackay published his influential book Memoirs of Extraordinary Popular Delusions and the Madness of Crowds. He renewed interest in bubbles which lasted awhile.
The term has come back especially strong since the late 20th century. It’s kind of a faddish term. It goes in and out. I think maybe it goes in and out correlated with actual bubble phenomena. Is the term “bubble” overused today? I don’t know that we use it too much. The question that people pose — are we in a bubble? — seems to me a little bit vague. We’re always in a bubble somewhere. Maybe there has been a bubble in bubble thinking, but that bubble has lasted for decades now, and it’s correlated with an improved enlightenment I think among some people.
What historic market parallels are currently on your mind?
I like to think of every important dislocation in history. For example, we had a famous panic in 1837. That’s a long time ago. It was preceded not by a stock market boom but a land price boom. It wasn’t a housing boom: The talk of the nation in the 1830s was agricultural land. There were lots of speculators pushing the prices up and then they eventually collapsed. It was associated with the banking crisis.
Then we have 1857, which I think is interesting because it was a panic that might be considered as leading to the Civil War in the United States. We have the 1873, ’79 depression, the 1890s depression, the 1907 panic, and the Great Depression. All of these are different. They tend though to involve some sort of speculation. You have to take into consideration they didn’t always focus on bubbles, or the word “bubble,” but there were things like that going on all the time.
Everyone likes to cite speculation in the lead-up to the Great Depression. Less well-known is the role President Calvin Coolidge played in the 1920s, as you noted in your address to the American Economic Association in 2017. Does the environment then remind you of the US political climate since 2017?
President Calvin Coolidge was an exceptionally pro‑business president. His most famous quote is “The business of America is business.” He was criticized for not bringing artists and classical musicians to the White House. He just brought businessmen. He liked businessmen. He believed in them. Whenever the stock market had a downturn, he would get on the radio — or Andrew Mellon, his US Treasury secretary would. Coolidge thought that was his job, to reassure the Americans that business is sound and profitable. It led to the biggest stock market boom seen at that point in history. I think it shows that political leaders do have an influence on the markets, so we can learn lessons.
The problem is that economists want to standardize the understanding of economic events. They want to have a simple model. The problem is it’s hard to standardize our understanding because ideas change and people’s thinking changes through time. That’s what I’ve been interested in of late, trying to understand how people thought in 1837, or 1893, and so on.
People are thinking a lot about trade wars lately. How would you expect such thoughts to reverberate?
Trade war acquired its clear, present meaning during the Great Depression. They talked about a trade war during World War I, but that had a completely different meaning. The trade war then was carrying on the physical war to disrupt the enemy’s foreign trade.
The 1930s depression, while it was happening, was blamed by many people on the Smoot‑Hawley Tariff, which came in 1930 and led to retaliatory tariffs in other countries. That story has reemerged lately. Most people have kind of forgotten about it, but that is a subject on the minds of investors now. Maybe not so much at the moment. It’s been in and out.
The Great Depression narrative, as I’m describing in my forthcoming book Narrative Economics, has become a legend. It’s become something that is exaggerated in its importance. Since there was a Smoot‑Hawley Tariff then, it becomes natural for many people to think that the Trump tariffs will do the same thing. So far, they’re not that big however, and it’s not Smoot‑Hawley all over again. Not yet. It’s something that’s more affecting our thinking than our actual economic constraints.
You focus on stories and attitudes in Narrative Economics. Why are these narratives so important?
I view this as a convergence of the social sciences. Economists see themselves as trained in economics and are reluctant to get involved in sociology, psychology, anthropology, or history. In fact, at this point in history, the economics profession is not very interested in learning history. If you’re going to be involved with forecasting, you have to use every available perspective to stay in touch with reality.
The theme of my book is that there are new ways of thinking that are encouraged by stories that people tell. We communicate through stories that are salient or that appeal to us in our thinking. Typically they have a human interest component and often a political component. They often affect our thinking and our moral judgment. The one thing I don’t hear from economists very often is that people feel that their expenditure patterns or their investment patterns are related to a sense of proper or moral behavior. A lot of curtailments of spending have nuances of boycott in them: “I’m going to boycott these companies.” It’s part of the emotional tenor that companies may face in bad times....
....MUCH MORE
Recently (June 1):
Investing: Professor Shiller On The Power Of Narratives
I distrust people who chatter about their narrative for this thing or that, it's just a gussied up attempt at manipulation. However...the outro from our May 27 post "The Alienated ‘Knowledge Class’ Could Turn Violent" contained this:
Narratives vs. Reality
Be careful when dealing with Turchin. Although it appears that he correctly forecast the violence of 2020, it is difficult to unravel whether he's on to something, got lucky or, in superimposing a worldview onto the world, is driving square pegs into round holes, shaving the corners to make them fit his template.
That said, on the other hand I distrust anyone who leads with "narrative" as that is the tool of charlatans and other deceitful peeps. With a carve-out for Professor Shiller who uses the concept as an explanatory model for economic and market zeitgeist....
Here's some copy pasta of that hyperlink. From Yale University's YaleNews....
Here's his Yale homepage.
And Irrational Exuberance website.
Related December 2023:
Numbers And Narrative: Large Language Models Can Improve Stock Market Forecasts
There was quite a bit of hubbub over narratives as a way to manipulate people five to ten years ago. This hubbub was mainly among the credentialed class who are themselves more susceptible to the charms of a good story well told. The high point was probably the use of the word in the title of Klaus Schwab's book “The Great Narrative” in 2022.
The working person doesn't read the news for the "narrative", they want the scores of their preferred sport and whether Timmy was rescued from the well he fell into. In this sense they are more fact-based than the been-to-college crew.
Another group, one that I fall into, are the semi-numerate, good enough at math to be facile but lacking the deep understanding that a real master effortlessly exhibits. This group is prone to overestimating their ability to manipulate numbers which leads to a weak point those who are smarter can use to manipulate. Because of this I have to constantly remind myself to ask: "What if I'm wrong." and then to attempt to discern what signs to look for that would indicate error.
All this double-checking cuts into one's cat video time.
So here we go with both the alpha [not that sort of alpha] and the numeric, combined.....
