Investopedia reports what Shiller (bubble-ologist) says:
The developer of the CAPE ratio, Nobel Laureate in economics Robert Shiller of Yale University, has been warning that current market valuations are unsustainable for the long run, as discussed in another Investopedia report. He is particularly concerned about "the public's lack of healthy skepticism about corporate earnings, together with an absence of popular narratives that tie the increase in earnings to transient factors," as he has written in an essay republished by MarketWatch.
I think it's easier to understand what's going on if you plot CAPE vs interest rates since the early 80s.
ReplyDeleteMore leverage should increase valuations (if for no other reason than that it changes the leverage that a private buyout firm could put on the asset to take it private); lower rates should drive more leverage as firms can carry more debt at the same interest cost (so higher ratio of debt to EBITDA).
This is very interesting because I've been doing some research on inequality using the Shiller PE index.
ReplyDeleteFrom 1880 to approximately 1980, the Shiller PE stayed within a range:
https://imgur.com/a/wP4C3wh
That image is the data from the same chart Prof. Froeb posted, with mean and +/- one sigma lines added.
Roughly in 1980, Something Changed. I suspect growing inequality due to US tax policy after Reagan's 1981 tax cuts.
Notice that since 1980, the Shiller PE Index has had a growing trend. Stock valuations are "overvalued" by historical measures and keep getting higher.
Also notice that, even at the bottom of the Great Recession, the stock market was only *slightly* undervalued compared to it's long-term mean. Which suggests that stock prices may not fall as much as some home when the next recession hits.
If you compared the Shiller PE against the 10 year US Treasury yield:
https://fred.stlouisfed.org/graph/?g=p08l
You'll notice that bond yields have been falling since pretty much the exact same time that stock market valuation started growing.
I believe the falling bond yield represents a "savings glut" due to inequality. A "savings glut" has grown faster than the available investment opportunities. Econ 101, when supply exceeds demand, prices (in this case yield) falls.
I'm not sure if Shiller PE represents the same thing applied to the stock market, or a side effect of the bond market. I suspect investors are "reaching for yield" in the stock market, paying a premium for each dollar of earnings because bond yields have been falling.
I'll have a long blog post about this in a few more weeks. Of course, I said that a few weeks ago, and the more I study it, the more interesting the problem gets.
Hello everyone, really dreams do come through, i no longer have to apply for loans and worry over my bad credit scores, i got my blank ATM card after so many trails all thanks to Mr George, if you are thinking if its actually real the answer is YES. Mr George is very good at his job i applied for the card and got it shipped to my country 5 days later and i have been using the card for two months, withdrawn a total of €30000 its totally untraceable, my life has transformed from paring an apartment in the slums to purchasing an executive condo with luxury furniture's and now my children can now attend quality schools, Mr George is an angel sent from God to the poor and needy. i am writing this with tears of joy as Mr George has removed my family from the life of want to the life of satisfaction. you can contact him through this email: blankatm402@gmail.com
ReplyDeleteBEST WISHES
This comment has been removed by a blog administrator.
ReplyDelete