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Robert Shiller's Prescient Warning on Stock, Bond and Home Prices Thumbnail

Robert Shiller's Prescient Warning on Stock, Bond and Home Prices

Professor Robert Shiller published a book in March of 2000 called “Irrational Exuberance.” The premise of the book was that the stock market was wildly overvalued and due for a fall. He didn’t tell you when the stock market was going to crash, but he made a compelling case it was inevitable. His timing proved impeccable. 

The stock market hit a peak the same month the book was published in March of 2000. From 1990 to March of 2000, the S&P 500 grew at an annualized rate of 20%. Investors doubled their money every three and a half years. It took a lot of chutzpah, or guts, for the Professor to make the case this was all about to reverse.

Before Thanksgiving of 2000, the S&P 500 was down by -10%. A year later in March of 2021 the market was down -20%. By the Fall of 2021, the market was down -30%. And by July of 2002, the S&P 500 bottomed -42% below when Shiller’s book came out.

Thus, it was with great interest that Bob wrote a new article for the New York Times on October 1st titled: “Stock, Bond and Real Estate Prices Are All Uncomfortably High.”  The professor helped create the Shiller CAPE ratio, which we use to evaluate the stock market’s valuation, and the Case Shiller real estate indices, which keep track of local and national home prices. He is a man of data. However, he is well aware that pervasive narratives can spread throughout society and cause stock prices to stray a long way from fair valuation. 

He lays out his thesis, one we ascribe too, to start the article:

"The prices of stocks, bonds and real estate, the three major asset classes in the United States, are all extremely high.  In fact, the three have never been this overpriced simultaneously in modern history.

What we are experiencing isn’t caused by any single objective factor. It may be best explained as a result of a confluence of popular narratives that have together led to higher prices. Whether these markets will continue to rise over the short run is impossible to say.

Clearly, this is a time for investors to be cautious. Beyond that, it is largely beyond our powers to predict."

He then attempts to piece together some elements of our culture that may have enabled us to arrive at this situation where gravity has been suspended and everything has become so overvalued at the same time. He attributes some of this to the easy monetary policies of the Federal Reserve, but he also ties in some dominant narratives of our modern era:

"Since 1997, in his “Rich Dad Poor Dad” books, Robert Kiyosaki has favorably compared his boyhood friend’s rich father, who was uneducated but had a strong business sense and drive, with his own poor dad, who was educated, politically correct and lacking in self-confidence. The reader is encouraged to identify with the rich dad. According to Publishers Weekly, the books have sold tens of millions of copies worldwide."

He ends the article in typical Columbo-esque fashion stating:

"Timing is important, yet it’s impossible to time the markets reliably. It would be prudent, under these circumstances, for investors to make sure their holdings are thoroughly diversified and to focus on less highly valued sectors within broad asset classes that are already highly priced."

We can’t help but think there may be a reason Shiller chose to publish this article on October 1, 2021. History will be the judge. But, it would be wise for readers and investors to heed his warning.