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YALE UNIVERSITY PROFESSOR Robert Shiller was one of three people to win the 2013 Sveriges Riksbank Prize in Economic Sciences (also known as the Nobel Prize in Economics).
Shiller is already idolised among economists. He famously predicted two of the biggest bubbles of all time: the dot-com bubble and the housing bubble. Both times, he published an edition of his book Irrational Exuberance, which described and predicted each respective bubble.
The theme of this year’s award was “Trendspotting in asset markets,” and the Nobel committee pointed to Shiller’s work in forecasting intermediate-term moves in asset prices.
“He found that stock prices fluctuate much more than corporate dividends, and that the ratio of prices to dividends tends to fall when it is high, and to increase when it is low,” said the Nobel Committee. “This pattern holds not only for stocks, but also for bonds and other assets.”
Shiller regularly updates his data and makes it available for free online.
He is responsible for two charts, that everyone in finance in the US – and beyond – follows very closely.
The first chart is of the cyclically-adjusted price-earnings (CAPE) ratio. CAPE is calculated by taking the S&P 500 and dividing it by the average of ten years worth of earnings. If the ratio is above the long-term average of around 16, the stock market is considered expensive. Shiller has argued that the CAPE is remarkably good at predicting returns over the period of several years.
As you can see, the CAPE ratio reached insanely high levels during the dotcom bubble.
The second chart is of a long-term look at home prices adjusted for inflation.
During the early 2000s, home prices took off, forcing Shiller to publish the second edition of Irrational Exuberance.
As you can see, homes are not great assets if you’re looking for real returns.
“Housing traditionally is not viewed as a great investment,” he told Bloomberg’s Trish Regan earlier this year. “It takes maintenance, it depreciates, it goes out of style. All of those are problems. And there’s technical progress in housing. So, new ones are better.
“So, why was it considered an investment? That was a fad. That was an idea that took hold in the early 2000s. And I don’t expect it to come back. Not with the same force. So people might just decide, “Yeah, I’ll diversify my portfolio. I’ll live in a rental.” That is a very sensible thing for many people to do.”
No one will argue that Shiller wasn’t deserving of the Nobel prize. If anything, it was long overdue.
- Sam Ro
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So Robert Shiller has been publishing this data since 1989, “that everyone in finance in the US – and beyond – follows very closely”.
Well clearly not by the Irish Bankers, Irish Stock Market, Central Bank of Ireland, Department of Finance & Financial Regulator in Ireland.
One can understand how it was so easy for Anglo to convince the former Government that the issue was liquidity when the people in authority were not using his data.
I don’t suppose you happen to have heard of Fanny & Freddie? The US may have had a teeny itsy bit of a bubble too, no?
The main problem is that an economist is someone who can tell you tomorrow why the prediction he made yesterday didn’t come through today.
It’s not an exact science nor will it ever be.
it’s not a science. full stop.
They shouldn’t be giving a Nobel prize for it then …
In my view the world’s economists are wasted on this earth……they should seek out new territory on Jupiter and inform the masses there!!!
most macro economics is horse manure, if they like mathematical models so much they should go off and study Actuary
its sad that having mere common sense can earn you a Nobel prize. the 2 charts are basically a version of buy low sell high. who ever heard of buy high and they better stay high forever.
Go off and get one for yourself so, and stop wasting your time spewing nonsense on the journal.
It’s all nonsensical!!
Hay I paid off off my mortgage in 2003 and I wouldnt have touched the property market after, it was as clear as day that it was going to go tits up. Jill Kerby a mere journalist was writing warnings after 2000 but nobody wanted to listen.
All ye Keynesian clowns need to read up on the Austrian economists, they are the only ones that have robust analysis on bubbles
The Irish economist Sean Corrigan predicted both the dot-com and housing bubble, but unlike Shiller, he is not acknowledged because he does not tell policymakers what they want to hear.
http://www.thefreelibrary.com/Who+predicted+the+bubble%3F+Who+predicted+the+crash%3F-a0119655655
Hulsman, Higgs and Reisman (as well as Shiller) are also cited in the attached article, but none are ever likely to receive a Nobel prize.
It might also be worth noting that an 18th century Irish economist provided the core analysis on which Austrian school theory was derived.
” It is especially noteworthy that all the Austrian predictions provided an economic explanation of the bubble and that their explanations were relatively consistent across the group. To generalize, the Austrians perceived the Fed to be following a loose monetary policy that kept interest rates below the rates that would have prevailed in the absence of that policy. Individual writers emphasized the Fed’s willingness to bail out investors consistently during the 1990s, thereby desensitizing investors to risk. As a result, a period of “exuberance” and wild speculation took place, culminating in the hysteria of a stock-market bubble. If the Austrian analysis is correct, the Fed has been a significant source of financial and economic instability. This analysis also suggests that the Fed’s bias toward keeping rates as low as possible may cause significant economic losses and that a better policy might be to let market forces determine interest rates without intervention.
Those who discovered the “boom” in the economy and the “bubble” in the stock market and who predicted either a “bust” in the economy or a crash in the stock market work within an analytical tradition dating back to Richard Cantillon, whose Essay on the Nature of Commerce in General was published in 1755. The Cantillon tradition was carried forward and extended in the works”
“Those who discovered the “boom” in the economy and the “bubble” in the stock market and who predicted either a “bust” in the economy or a crash in the stock market work within an analytical tradition dating back to Richard Cantillon, whose Essay on the Nature of Commerce in General was published in 1755. The Cantillon tradition was carried forward and extended in the works of Turgot, Say, Bastiat, Menger, Wicksell, Bohm-Bawerk, Mises, Ropke, Hayek, and Rothbard, and it is now a hallmark of the modern Austrian school of economics.”
@Sean, very interesting thanks, its certainly an Austrian view that interest rates should be left to the market and that moral hazard in the financial system should not be encouraged. You might get walls of money chasing particular assets but they must not be bailed out if they get it wrong. LTCM and dot com. could both have been left unravel naturally and if they had the fuel for the US housing bubble would have been reduced and interest rates would have been higher from 2000-07 which would have been a good thing.
Has anyone applied that second graph to the irish market recently could help inform people of the real market value of property.
“Housing, traditionally, is not viewed as a great investment”. Eh, what were we told back in the boom? I’m over thirty so I remember the spin from the pundits, politicians, economists and their media catamites.
Can you quote me an example of any one saying house’s are good investments, beside some one on a TV show?
Economists are very good at propositions and rationalising after the fact. To quote someone tired of economics predictions starting with “Well one the one hand….” What we need is more “one handed economists!
It is not a science, after all, how can you empirically demonstrate a rational outcome, before or even after an event, caused by an impulsive herd mentality?
The herd just constantly ignores some basics that can be derived from long term analysis like the time value of money, international norms in financing long term finance, cyclical patterns, supply and demand and so on. Our gambling instincts get the better of us and we believe we are better than the rest of the pack. Imagine seasoned politicians and economists actually believing we were the second wealthiest country in Europe. Some plonkers and most of us fell for it and acted accordingly.
“…tends to fall when it’s high and increase when it’s low.” Wow, what science, just amazing and revolutionary really, isn’t it? (Sarcasm). Strange the way the charts don’t actually predict anything, there just empirical data.
There are to many economics, what do they contribute to any business or bank. The media love them. You can always get two with opposite views. They are a waste of money.
“Economists”
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