Sunday, September 13, 2015

Shiller calls "bubble"

Robert Shiller has successfully called "bubble" twice before, in 2006 on the housing market, and in 1996 on the stock market.  Now he has called "bubble" on the stock market, based largely on his famous P/E ratio [Price/Earnings] graph, reproduced above (since June, it has come down a little).
“It looks to me a bit like a bubble again with essentially a tripling of stock prices since 2009 in just six years and at the same time people losing confidence in the valuation of the market,” he said.

Of course, not even Shiller can predict when the alleged bubble will pop. He was a year early on the 2007 housing bubble bursting, and 3 years early on the 2000 stock market bubble.  Unlike a lot of economists, Shiller is willing to admit he has no idea when it will pop, if indeed it it a bubble:
... [Shiller] made clear that it remained impossible to time any fall in the market, and cast doubt on whether stocks would drop should the Federal Reserve raise rates later this week.


  1. The information provided for predicting the Stock Market "bubble" focuses on use of the P/E ratio. The P/E ratio provides an idea and trend of how much is an investor willing to pay for a dollar of profit (Brigham/Ehrhardt, 2014). While the graph and chart provides for a tripling of P/E ratio is this a forecast of an economic or accounting bubble? The true measure of wealth is when assets move from lower value to higher values (Froeb, 2014)

    Looking at the Stock Market "bubble" and value a consideration of stock price/EBITDA (i.e. Earnings Before Interest, Taxes and Depreciation). This measure provides a better measure of operational performance (Brigham/Ehrhardt, 2014). Eliminating taxes and depreciation provides for a performance measure that is based upon the relevance of the decision, avoiding the sunk cost fallacy (Froeb, 2014).

  2. Shiller's calls are legendary. In the September 12 issue, two weeks ago, Barron's Andrew Bary interviewed Joe Rosenberg, the Chief investment strategist for Loews. Rosenberg states that the last 15 years of return of the S&P 500 has been just 3.8%, and should revert to the mean with above average performance over the next fifteen years. Rosenberg sites that this return is lower than the return in 1974 that ended that bear market. UBS analyst, Peter Lee reviewed the presidential election cycle in October 2013, which supports increasing valuations in the third and fourth years of a presidency. My interpretation of the conflicting market calls is to play the election cycle and remain invested, riding out shorter term bumps and watch out after the 2016 election, particularly if Trump is elected!