Yale Professor and Nobel Laureate Robert Shiller has been a leading light in the world of investing for many years. Has he lost his way?
A recession would doom President Trump’s reelection chances, according to Robert Shiller. But he said the chance of that happening before next November is less than 50%. I disagree. I put the chances at 60% if not higher.
Shiller: A Recession Will Doom Trump
AdvisorPerspectives, 9/27/19
Shiller is a professor of economics at Yale University and a co-recipient of the 2013 Nobel Memorial Prize in Economic Sciences. His political prediction is built on his work on narratives, which is the focus of his next and 13th book, Narrative Economics, available through the link on this page.
Trump knows that a recession doesn’t fit in to his theme of “make America great again.” There is enough evidence that recessions are bad news for incumbent presidents, Shiller said.
“A recession will spell the end of the Trump presidency.”
But Shiller made some odd comments about the CAPE ratio that he invented. CAPE is at a historically high level (almost 30 in the U.S.) in part because of the Trump narrative, Shiller said. “Even those who don’t like him are inspired by his tough business attitude.” Seriously? I have not heard a single anti-Trumper express this sentiment.
“It’s much more fun to go to a Trump rally and invest in stocks that have a great story,” he said, “than to pull back on stocks.”
The stories economists tell
Shiller says that economists are neglecting narratives, which he thinks is a mistake. “The human mind is influenced by stories. Our thinking changes as narratives change, especially when a narrative goes viral, which can happen fast on a global basis.” That may be true, but narratives don't drive stock prices. Earnings do.
Since last year, he said, talk about a recession has been “blooming.” I agree. An inverted yield curve, according to the narrative, predicts recessions reliably.
This is where I begin to have a problem with what Shiller is saying. The idea of an inverted yield curve predicting a recession may be part of the narrative Shiller is describing, but it's also established economic fact. It seems as if Shiller is attempting to hijack economic history and re frame it as nothing more than narrative and folklore. Might he have lost his way?
Is the inverted yield curve just fake news?
Shiller suspects that the inverted yield curve narrative is the result of data mining. Indeed, he said, that narrative could be so strong that recessions after an inverted yield curve happened or were extended, in part, because of the narrative. You've got to be kidding me. It's time to bring out the analogy machine.
A patient presents symptoms of a heart attack. The ER doctor diagnoses high likelihood of a heart attack. Is the doctor's diagnosis just a narrative? Data mining of symptoms? When the doc told the patient he was at high risk of a heart attack, did that cause the heart attack?
Artificial Intelligence
Another narrative, around artificial intelligence (AI), is “in the background,” he said. It has people scared that their jobs would be automated away by AI. That narrative is not dominant yet, but he said it could come back if there is a recession, and deepen that recession.
“When your next-door neighbor is suddenly laid off and can’t find a job and has to sell their house, that startles people,” he said. “If you think this is going to be a long haul, then of course you will cut back on vacations and other optional expenses.”
The macro and investment outlook
Shiller was cautious about the ability of monetary or fiscal policy to counteract a possible recession.
Central banks have some ability to fight recessions, he said, as they did during the financial crisis in a synchronized way. But interest rates are so low that cutting rates, especially in Europe, won’t work.
“If rates go any more negative,” Shiller said, “people will withdraw cash.” Withdraw cash? What does that mean, exactly? And where will that withdrawn cash go, I wonder? Into stocks? Gold? Bitcoin? He doesn't say.
CAPE - Shiller's claim to fame
The high U.S. CAPE signifies overpricing, but it is not a clear indicator to go from stocks to bonds, according to Shiller. Bonds are also expensive and overpriced on a long-term basis. He advised allocating within the U.S. to low-CAPE sectors.
“There are always bargains,” he said. True enough, but it's hard to square this with his larger claim that the market in general is grossly over-valued from a CAPE standpoint. (Pick a lane, dude.)
He said four of the 11 sectors in the S&P 500 have low CAPEs relative to their history: communication services, materials, technology and health care. Technology is expensive on an absolute basis, but not relative to its history. (This is perhaps the most useful information he has to offer in the article.)
“In the long run, we’ll do all right,” Shiller said. “Stocks are still a good investment for the long run even though they are a little bit expensive in the U.S.” Seriously? A little bit expensive? Then why have you made it your mission in life to warn us about overpriced markets?
Should we now consider CAPE as a loosey-goosey measuring stick that doesn't have much influence in the market? What should we pay more attention to - Shiller's formidable body of work as an economist, or the sound bites he offers to the media while promoting his latest book?
Bobby, we hardly knew ye.