The Dow and S&P 500 once again closed at record highs last Friday, and investors continue to be bullish on the American economy. Nobel Prize-winning economist Robert Shiller sees things differently and has been warning of market bubbles.
A bubble is a social epidemic of enthusiasm and excitement spread by word of mouth, attracting more and more investors into a market.â€
In the new edition of his book Irrational Exuberance, Shiller argues that many traditional investment assets are now driven by investor psychology rather than fundamental realties. From housing to stocks to bonds, Shiller sees the American economy entering a new era in which traditional investment approaches need to be reconsidered.
Shiller spoke with Yahoo! Finance about the standard mentality of achieving long-term asset growth in the broader stock market.
A lot of people are holding on to old facts, old presumptions. Like for example, the stock market yields 10% a year. But it’s really expensive now. How about the bond market? Well, yields are practically zero now. People haven’t done the simple arithmetic…
“I don’t know what’s going to happen, but I see that asset prices are high. This means that this is not the golden age for investing. We should not assume that it’s going to be as it always was…â€
Shiller isn’t just reluctant to encourage investment in traditional stocks. He is also very reserved about the health of the US housing market, which has been a major pillar of the American economy since World War II. Yesterday we learned that existing US home sales fell 4.9% in January to the lowest level in 9 months.
Housing starts are also very low by historical standards, which Shiller blames on the long-term trend of “boomerang kids†– adult children who leave the household only to return a few years later to live with their parents. Young adults simply are not buying houses like their Baby Boomer parents did. As Shiller puts it:
