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"It Looks To Me Like A Bubble Again", Shiller Warns On US Stocks

Looking out across markets it would be difficult to overstate the number of risk factors at play. 

Thanks to a veritable collapse in commodity prices made worse by what China’s move to devalue the yuan telegraphed about the prospects for the country’s economy, emerging markets and especially commodity currencies are under siege, a situation that’s putting a tremendous amount of pressure on accumulated FX reserves which, all else equal, will serve to decrease global liquidity and put upward pressure on core yields, offsetting the QE effect in a kind of push and pull dynamic. This is the situation facing the Fed as the FOMC ponders whether a symbolic 25 bps liftoff would exacerbate the situation or whether markets are resilient enough to cope with a dovish hike. 

Of course the truly dangerous thing about the above is that it comes after seven years of policies designed to inflate asset prices and misallocate capital. Add in an acute lack of liquidity and the presence of nefarious algos and you have the recipe for spectacular turmoil like that we witnessed on August 24 when the Dow fell 1,000 points out of the gate in a bout of flash-crashing, circuit breaker tripping mayhem. 

Considering all of this, the wisdom of being heavily invested in US equities (or any risk assets for that matter) might fairly be questioned, and indeed some very “serious” people are sounding the alarm. Here’s FT with spoke with Robert Shiller on the sustainability of the US equity market bubble:

A growing number of investors believe that US stocks are overvalued, creating the risk of a significant bear market, according to research by Yale University market scholar Robert Shiller.

 

The Nobel economics laureate told the Financial Times that his valuation confidence indices, based on investor surveys, showed greater fear that the market was overvalued than at any time since the peak of the dotcom bubble in 2000.

 

“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.

Shiller is apparently skeptical about the extent to which a Fed hike will be the trigger for a dramatic sell-off.

“I’m not looking for any big effect,” he said. “It’s been talked about for so long, everyone knows that it’s coming. It’s just not much of a big deal.”

As we’ve said repeatedly of late, in a vacuum, a 25 bps hike is probably not a big deal, but not only is the Fed not operating in a vacuum, global markets are more interconnected than ever before and now that the confluence of factors mentioned above have put the whole of EM on the verge of a meltdown, the slightest policy error could reverberate, triggering crises in LatAm and AsiaPac which would most certainly weigh on DM markets. 

In any event, Shiller’s simple point is that in his eyes, the market is getting nervous and while we can argue about the triggers and proximate cause, the bubble will burst one way or another as investors re-think their exposure:

He said the recent bout of volatility “shows that people are thinking something, worried thoughts. It suggests to me that many people are re-evaluating their exposure to the stock market. I’m not being very helpful about market timing but I can easily see aftershocks coming”.