Robert Shiller on the Nascent Recovery

A social epidemic is supporting renewed confidence. This confidence can keep growing by contagion, as a kind of self-fulfilling prophecy, and we may see the markets and the economy recover further. But in an economy that is still unstable, the stories could also morph into different forms, the price feedback could turn downward and the dynamic could turn ugly again - just as it has in the past.

-Yale professor Robert Shiller via The New York Times.

More of Shiller’s views are discussed in the recent CNBC interview below.

Source: CNBC, August 31, 2009 and The New York Times, August 29, 2009.

Comments

[Joseph L. Shaefer]

Prieur, thank you for reminding me why I stopped watching the Constantly Noisy Bull Channel (CNBC) years ago. I thought perhaps my one interview experience there was unique but your providing this video proves it wasn't. Every time Bob Shiller tried to explain something, the two "look at me!" talking heads cut him off.

CNBC's approach seems to be, "Just tell us what you think is going to happen TODAY!" [Followed by an attempt to by the respondent to explain why that's an idiotic approach, followed by...] "There you have it, folks! Stay tuned after these 27 commercials for someone else's response to our unimportant questions and, hey, check out my hair while we go to fade-out!"

To see what he thinks rather than what they show, I'll read his comments in the Times....

2009 Sep 02 11:56 AM

[CautiousInvestor]

An interesting piece that helps explain why the market tends to overshoot on both sides.

Longer-term, though, I'm afraid we are hostage to two intertwined developments that will cast our fate, making equities very challenging. First, we have the new normal and all that it encompasses, including deleveraging, slower groth, lower profits and a more intrusive government.

Implicit within the new normal is that final demand will crawl along at the pace of a snail, resulting from efforts to save and liquidate, widespread underemployment and failure to develop new industries and jobs. Most recently, these jobs have sprung from the offshoots of science (PC, Internet, cell phones, personal assistants, internet infrastructure and others) and the formation and growth of small businesses.

Rather than transfering wealth and income and passing down perverse incentives, the core of the stimulus plan should have been to encourage all businesses, particularly small businesses, to expand exports while increasing private investment in industries with both substantial employment and export potential. In parallel, the package should have offered businesses strong incentives to explore new frontiers and develop new technologies to support our needs twenty years from now. We need to create replacement demand; we are living off our flesh.

Similarly the TARP program was all about saving the banking sector and sparing the economy some type of financial Armageddon. Well, we avoided that fate but small businesses are dying on the vine because they cannot secure access to credit because of general conditions and their dependence upon smaller banks that have not benefited from either TARP largesse or anything in the stimulus package. Largely republican owned, these smaller entities are being completely over looked even though they have been the jobs engine in the last ten years. We've lavished money on the indigent, the consumers who fail to produce, all forms of interest to labor and the banking oligarchies, but small businesses are being thrown beneath the bus. Oh well.

But because we choose to pursue deformed and twisted priorities we are stuck with all that the new normal includes, including low growth stemming from weak final deamnd. Another major element of the new normal that has not been fully addressed is the relationship between financial leverage and P/E ratios; looking back, we can see that both started changing in the early 80's. A possible thesis is that if companies delever as there are expected to it's quite possible that the rules of valuations will change and return to the ground rules in place in the early 80's

Historically the dividend yield on the S&P 500 has been around 5%
and if we were to price the index today to offer the same yield we would be around 515. This is not a forecast but a suggested possibility.

2009 Sep 02 01:57 PM

[optionsgirl]

Probably the three most important words in Shiller's interview:
" I don't know."

2009 Sep 02 02:04 PM

[Will.i.am]

With all the changes in housing, can someone explain the model inputs and define if they are all still effective and relevant?

2009 Sep 02 02:13 PM

[Larry House]

Listen to much, believe little. CNBC folks are too much.

2009 Sep 02 02:51 PM

[Stan Sutfin]

I agree with comments about CNBC. Problem is there is really no other financial news network

2009 Sep 03 02:16 PM