Economics

¿El inminente mercado bajista?

Sep 21, 2017 Robert J. Shiller

NEW HAVEN – El mercado bursátil de Estados Unidos hoy se caracteriza por una combinación aparentemente inusual de valuaciones muy altas, seguidas de un período de fuerte crecimiento de las ganancias y muy baja volatilidad. ¿Qué implican estos mensajes ostensiblemente contradictorios sobre la posibilidad de que Estados Unidos se encamine hacia un mercado bajista?

Para responder esa pregunta, debemos analizar los mercados bajistas pasados. Y eso nos exige definir con precisión qué conlleva un mercado bajista. Los medios hoy en día califican a un mercado bajista "clásico" o "tradicional" como una caída del 20% en los precios de las acciones.

Esa definición no aparece en ningún medio antes de los años 1990, y no ha habido ningún indicio de quién la engendró. Puede tener sus raíces en la experiencia del 19 de octubre de 1987, cuando el mercado bursátil cayó poco más del 20% en un solo día. Los intentos por asociar el término a la historia del "Lunes Negro" pueden haber resultado en la definición del 20%, que periodistas y editores probablemente se copiaron unos de otros.

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Robert J. Shiller

Writing for PS since 2003
130 Commentaries

Robert J. Shiller, a 2013 Nobel laureate in economics, is Professor of Economics at Yale University and the co-creator of the Case-Shiller Index of US house prices. He is the author of Irrational Exuberance, Phishing for Phools: The Economics of Manipulation and Deception (with George Akerlof), and Narrative Economics: How Stories Go Viral and Drive Major Economic Events.

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0 Comments on this paragraph, 22 Comments on this article

nedim bazdar Dec 30, 2017

How is today's CAPE impacted by the oversized contribution of the large tech firms to the index? Is there merit in excluding the FAANG companies from the measure to determine a more traditional measure. With the exception of Alphabet and Apple, the other of the large tech companies would have very lofty valuations with very little historical earnings and thus would attract astronomical CAPE ratios; and given their relative size, would have a disproportionate impact on the overall CAPE measure. I guess the question is whether the CAPE measure is appropriate given the composition of the index these days, or whether the actual valuations for these companies is appropriate. Would be interested in others' views on this.
- Douglas Costello Dec 30, 2017
  
  By excluding the FAANG companies or assuming because the market mix of companies is different today, is simply massaging the data and potentially delaying recognition that the market is meeting all the old markers.
  
  I suspect throughout the period analyzed the mix of enterprises comprising the market has been different at each of the 13 events.
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Henry Rech Nov 30, 2017

There is madness in the air. Just look at Bitcoin. (I predict that Bitcoin will soon be renamed "Bitchcoin".)
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Mauricio Duran-Loriga Oct 9, 2017

The jaws of death are opening wide, but it is a mathematical certitude they will close back with a vengence.

The current bull in equities has been fueled by price insensitive buyers, mainly corporate repurchases (70%) and central banking "invisible" put (30%). Private investors have been exiting the markets since mid 2007 tocover for their pension fund's earnings shortfall.

Unless price insensitive buyers stop bidding equities, markets will keep climbing no matter how outlandish the valuation metrics become under historic perspective.

ZIRP enables corporate repurchases. The other side of the ZIRP coin is the earnings shortfall in the pension funds, who obviously invest a majority of their AUM in fixed income, however low yielding. Mandatory.

Pension funds need an annual average of 6,6% income growth to pay for their promises. Over the last decade, they are getting less than 0,5%. Millions of retirees need to cover for this shortfall in their pension funds, and sell their financial assets, littl by little. It will become structural and widespread, as demographics will further strengthen in this direction (more retirees needing additional funds, and less working people saving for retirement).

These are price insensitive sellers. who will inevitably collide with price insensitive buyers. To keep the markets climbing under such circumstances, central banks will need to push the long end of the curve into outright nominal negative rates (forget about stories of people stashing cash in the mattress).

They would need to print dozens of trillions annually to get the US 10Y Bond into -1% or lower. Which will further reinvigorate the pension funds earnings shortfall. That central banking-induced liquidity will have disastrous consequences for asset prices.

Under that scenario, once nominal rates sink into negative for the long end of the curve, pension funds will have to liquidate all their fixed income assets at any price, fast and furious, because under nominal NIRP, the longer you hold the bonds, the more you lose, the earnings shortfall morphs into savings destruction. Enticing?

This is unavoidable.

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By December 2018 the tapering Fed will have drained 500 billion in liquidity.
By then, the US fiscal deficit will be north of 1 Trillion.
Best case scenario, someone has to step in big time and buy 1,5 trillion in low-to-no yielding bonds.

Logic tells me the equity market is close to experience a short lived (but steep) selling momentum for the panicky herd to scramble for 1,5 Trillion of pestilent no-yielding "risk free" bonds.

Then the Fed will be justified to reverse course and drive rates negative, which will make the abovementioned scenario a live phenomenon, and THAT one will be the real bear that no one dares to imagine.
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Jose araujo Sep 26, 2017

Professor, I have to confess my disappointment on reading this article, because anybody can defend we are pre-crash. All that goes up,must come down.

I was expecting an article explaining the why (and I doubt CAP can capture the nature of value nowadays, just look at the biggest companies in the US that have positive valuations and negative or low returns).

Why did the market stopped being efficient? We are not living times of exuberance, like in previous crisis. No times of unfounded expectations, unlimited growth. We are still in a recession mode, nobody expects great things from the economy...

Now, I have a theory that can explain what is happening without resorting to the all that goes up must come down, and that does not mess with market efficiency.

My theory is that we are living in a severe liquidity crisis, money velocity is still going down and the demand for liquidity and safe assets is on an historic high (interest rates at 0%, no inflation, etc).

In a time where there is a severe shortage of liquidity, and the monetary authority position is to withdraw the liquidity, what would you expect to happen in the markets?

That's why on the previous hike, yields gotten flatter, interest rates didn't pick up, and the markets didn't correct.

Its the liquidity...
- Jose araujo Sep 26, 2017
  
  Also why when uncertainty gets worst stocks appreciate and yields get flatter...
  
  All the contrary of exuberance..
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Gary Palmero Sep 24, 2017

One new factor in today's market is that there is a constant inflow of incremental money from pension and individual retirement plans well in excess of whatever may have existed in the past. Also, in past rising markets, new equity supply would be forthcoming through equity offerings and equity mergers when prices started to indicate a rich valuation.

In today's low interest rate environment, equity is being retired by many companies through stock buybacks. Many mergers are still being done with debt...since it is less expensive than issuing stock. Also, I would argue that the value of a well run company with good finances and a rising dividend stream is far greater, per se, than it has been historically.

Dr. Schiller has been an invaluable contributor to financial market dialogue for many years. He will eventually be right as investment psychology has a habit of going off the deep end from time to time. I offer the above only to try to analyze why we are where we are now. What will eventually put pressure on equity prices are competitive returns from debt instruments (higher interest rates) and that is not likely to happen soon since the power structure appears to favor the current status quo.
- Jose araujo Sep 26, 2017
  
  That does not explain commodity prices behavior and also does not explain why investment isn't going up nor consumption.
  
  It also does not explain the huge demand for 0% interest rate debt.
  
  IMHO this is fundamentally a different scenario.
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Bryan Atkins Sep 24, 2017

Dr. Schiller,

"Investors who allow faulty impressions of history to lead them to assume too much stock-market risk today may be inviting considerable losses."

Gotta call that statement and the article what it is: terminally myopic fluff per the status quo's refusal (inability?) to get fundamental. One fundamental is to invoke this knowledge / wisdom / truth: “We need scarcely add that the contemplation in natural science of a wider domain than the actual leads to a far better understanding of the actual.” Sir Arthur Eddington

Big Picture Fundaments:
1. Understand code, including monetary code, in a physics, evolution and complexity context. (Economists fail at this.)

2. Understand that passing natural selection tests is primarily a function of processing complex relationship information with sufficient reach, speed, accuracy and power.

3. Understand that world culture's dominant app for generating Selectable relationship matrices in-and-across Geo Eco Bio Cultural & Tech networks--humans deploying monetary code--lacks sufficient reach, speed, accuracy and power.

4. Understand that the dominant phenomenon of our era--exponentially accelerating complexity--is an emergent phenomenon that we can't handle with our archaic cultural genome (see #1). Hence we're converting the sky into a lethal gas chamber of commerce, arming it with weapons of mass extinction that bring the promise of "a premature and perverted death" for our descendants. Economists have literally externalized the sky while extolling the trade "benefits" and "efficiency" of 20 countries shipping parts to construct a Barbie doll. Can't get away with that; and we ain't. Verily, that's called being lethally wrong. Pssst: The sky? That be fundamental.

Don't like my strident manner of relationship interface? Understood. I don't like the status quo's cutting on my daughter's neck, day after day, year after year.

Probably already too late, but here's a knowledge dot collection, albeit incomplete. I've tried to hook up the dots into a thought-structure:
Culture, Complexity and Code: http://ow.ly/4mJQ2r
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Andrew (Andy) Crow Sep 24, 2017

Good stuff Prof Schiller. The markets are riding high, so a crash is (over?)due. But it might not happen soon. You get paid for writing this?
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축복 축복 Sep 23, 2017

Expected
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Procyon Mukherjee Sep 23, 2017

More than the Bear, we should be concerned with the risk concentration, with the top 10% of S&P 500 holding the bulk of the high end; the ratios have to be compared with the moderately long period of almost zero Fed rates, which has no parallel with the earlier periods used in the comparison. The uptick of interest rates must make an impression, it cannot sing the same song that the Bulls make.
- Jose araujo Sep 26, 2017
  
  Because stocks are being used like bonds and riskless assets. Its a liquidity crisis, that is being confounded with time of euphoria.
  
  There is no euphoria, quite the contrary. Uncertainty goes up, stocks rally and yields get flatter.
  
  What more it will take for people to understand that there is a liquidity shortage....
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Dave Blum Sep 23, 2017

Well, the author wrote the same warning about a year and a half ago. With companies sitting on record amounts of cash - literally record see Bloomberg yesterday - if 2 trillion dollars were to leave the stock market, where would it go? What would it do? Why?
- Jose araujo Sep 26, 2017
  
  Good post...
  
  Collective hysteria, where all are shouting for bubbles, but no one has a positive take on the future.
  
  Times where uncertainty goes up and stocks appreciate...
  
  Its the liquidity crisis
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Joshua Soffer Sep 21, 2017

Interesting that a few days ago Shiller was arguing that, unlike 1920 and 2000, " at the moment, the psychological preconditions for a spiraling downturn don’t appear to be in place".
https://www.nytimes.com/2017/09/15/business/stock-market-mass-psychology.html?mcubz=3&_r=0
I dont know if he's changed his mind in the past 6 days. He does mention that volatility in 1929 was low as it is today. He may not have noticed that before.
Probably he is just acknowledging that, while the long term data provides a solid basis for predicting a sharp downturn is inevitable from these heights, the signs along the way may be unique to each bubble.
- Jose araujo Sep 26, 2017
  
  And they don't. I don't know why Schiller made this article. Big disappointment.
  
  He is really one of the few economists I admire....
  - Joshua Soffer Sep 26, 2017
    
    I think exuberance is too vague a concept to be measured precisely. There are numerous indices of investor bullishness and these often contradict each other. Just this past week a Gallup polls showed investor confidence reaching a 17 year high. I think the business cycle is a better predictor of bubble peaks.
    With an unemployment rate recently as low as 4.3% and an expansion more than 8 years long, we are clearly very close to the end of this cycle. What we know from history is that stock market valuations become more and more inflated, relative to earnings, over the course of every business cycle. Recessions begin typically a year after the unemployment rate bottoms, but bear markets start in much closer proximity to the cycle's peak. I dont think this time will be different.
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- Joshua Soffer Sep 21, 2017
  
  I meant 1929, not 1920
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Marc Laventurier Sep 21, 2017

Prof. Shiller always seems constructive, almost a CAPEd crusader for prudence and good sense. But as any viewer of Bloomberg knows, market practitioners have raised monomaniacal money-grubbing to a high graphic art, and it's just worth noting that market analysis can be practiced with such distinct motivations.
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Steve Hurst Sep 21, 2017

Well the market got Trumped up, and as Trump himself has acknowledged he didnt know what he was getting into. Trump: I assumed when I won, I would 'sit down at my desk and there would be a healthcare bill'
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