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Robert Shiller: Unlike 1929 This Time Everything – Stocks, Bonds And Housing – Is Overvalued

May 29, 2015

Robert Shiller: Unlike 1929 This Time Everything – Stocks, Bonds And Housing – Is Overvalued

Robert Shiller is a professor of economics and finance at Yale University. He is the author of Irrational Exuberance, which in 2000 predicted the collapse of the tech bubble and is now in its third edition. He was awarded the Nobel Prize in Economic Sciences in 2013 for his work on asset prices and financial market behavior.

In the attached interview he observes that the recent equity run-up seems to be driven more by fear than by exuberance, as a lack of confidence in the future prompts investors to save more and thereby bid up asset prices.

Below is an interview he gave to Goldman Sachs’ Allison Nathan

Allison Nathan: Are US stocks overvalued today?

Robert Shiller: I think that compared with history, US stocks are overvalued. One way to assess this is by looking at the CAPE (cyclically adjusted P/E) ratio that I created with John Campbell, now at Harvard, 25 years ago. The ratio is defined as the real stock price (using the S&P Composite Stock Price Index deflated by the CPI) divided by the ten-year average of real earnings per share. We have found this ratio to be a good predictor of subsequent stock market returns, especially over the long run. The CAPE ratio has recently been around 27, which is quite high by US historical standards. The only other times it has been that high or higher were in 1929, 2000, and 2007—all moments before market crashes.

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