Where the bubbles are now

Apr 23, 2014 @ 12:00 am

Runtime: 8:54

Robert Shiller, professor of economics and finance at Yale University and winner of the Nobel Prize in economics, names four sectors he believes are undervalued now -- and shares his thoughts about bitcoin.

Video Transcript

[MUSIC] This week on WealthTrack, financial thought leader and Yale Professor, Robert Schiller won the Nobel Prize for Economics for his ground breaking work on market bubbles. [SOUND]. Where does he see bubbles developing now? Robert Schiller is next on Consuelo Mack WealthTrack. [MUSIC] We've had a, a phenomenal bull market after the 2009. We have. Low, of course. We forget how we got to the 2009 low after a while. Yeah. So what's, what's the story, the prevalent story do you think about the stock market right now? Well let's go back. Yes. To 2009. I do questionnaire surveys, of invest, you can see them on my website. The results. And I have something called a crash confidence index. I, I just ask people, do you think that something like a 1929 crash is, is possible? And I have an index of how many people think that. That index reached an all-time low in 2009 which means that I know that even though the market was low, people were telling me they were worried about a crash happening going into the future. Since then, it's rebounded. They, they've given up on that. And so the market came back. But then the next story is that the stock market leads the business cycle and everyone says we're having a disappointing recovery. But the stock market, you, you don't want to wait until the recovery is secure and established. You want to buy early. So, that's what people have been doing and then they've been propelling it up and it starts attracting enthusiasm as it always does, during a bull market. So isn't that a healthy phenomenon? And isn't that something that, that as investors, that we can take advantage of if we see, you know in, in confidence increasing then isn't that a reason to be invested in the stock market? Well, I'm working on that. [LAUGH]. I think, it's hard to predict the market, in the short run. One thing, momentum, upward momentum has been identified in the stock market. There's a nice long academic literature, but it's weak. It's not as strong as you'd think. You mean weak is a predictor of where stock prices are gonna go? Yeah. I think there is some upward, there is upward. But then it will peak out and surprise you and go down. So I don't, I don't have a good science. I wish I did. But it's easier for housing. Housing shows much more momentum. So right now, home prices are going up rapidly. I kind of think they will for another year or more, maybe not as rapidly. So, if you're thinking of buying a house and you don't care between this year and next, maybe, maybe you should do this year. But I don't want to make too much of that because, even that market is unpredictable. Bob, you know, are you investing in the stock market right now? Right, I am. How would you. Yeah. Describe your attitude towards the stock market right now. Personally I have something like a 50% exposure. Mm-hm. Half of my assets is in the stock market. I'm looking at value, from a value perspective. Mm-hm. I have a value index. And I have which is a conventional value index and I have sector indexes that are low, low priority. What are the low cape sectors right now? The lowest cape sectors. Right. So right now the the 4 sectors that my colleagues at Barclays and I have identified are healthcare, industrials, consumer staples and now technology again. But that, those are the sectors that I think are substantially better prospects. Right Than aggregate markets Interesting that the technology is now, right? One of the best values in the market. Well, things come and go. You know, I did a long study of sector performance in the United States and what about railroads. [LAUGH] That was a sector that people wrote off like 80 years ago. They thought, it's a declining sector because we had automobiles and airplanes. So where, where, what about railroads? They're dying. But you know what? They come in and out. There are times when railroads are great investments and times when they're not. It's all price relative to some fundamental. And, I'll tell you a great time to invest in railroads was at the beginning of this century right after the stock market crashed. Right around that time railroads were cheap and they did very well. And guess who bought them? Warren Buffet [LAUGH]. Warren Buffet. Bought the railroads. Exactly. So that, that people, the people approach investing with prejudices and rather than just looking at value, looking at what company is well managed, and has a proven record, and just compare the price for that. That's not always so easy to do but there are approaches to doing that. So how actively do you trade? Not very active, I don't trade very often. You don't? Because it's costly to trade. Mm-hm. And there, that's the one lesson that I've learned from various advisors that a lot of people eat up their profits with trading costs. What are the signs that, that you look for in the market that are gonna tell you that the market is really over valued? Well, it may not be extremely clear, and extremely obvious, I have this cap ratio that's but I don't think it's extremely obvious right now. It's somewhat high, but then look the alternatives you know, the interest rate is 0 on the short rate at least. And long bond yields are low, so it's the it's it's not giving such clear signals right now. It's only, you know, this is another problem. This is another reason why it's difficult to beat the market. Sometimes you might have a way of judging the market that gives you a buy or a sell signal once every 10-20 years. And you can't make a career of that. It doesn't come along often enough Right, but individuals can, because. Well, yeah, so, I do think that, in 2000 the market looked really overpriced. Stock market. Right. And then in 2005, the housing market looked really overpriced. And now it's not as clear in either of those cases. So, I think there's one market that you said it's pretty clear that it's in a bubble, and that's the Bitcoins market? Right, right. So what's going on? I mean is this a fascinating phenomena for you? Well bitcoin is fascinating because it represents a new computer technology for transferring funds. That's interesting. The actual bitcoin experiment is generating competitors and I think that maybe something good will come from this. I wish that they could produce a, a medium of exchange that had more stable value but I More stable value than the dollar, than Well more stable than the bitcoin [LAUGH] why are we unstable? How much it is right now? Oh okay, okay, right right. But I think what's happening is that people are attracted to bitcoin partly out of envy for people who've made a lot of money including the inventor of bitcoin who refutedly is a billionaire. I love it, refutedly that's his story. We don't even know who it is. We, exactly And the other thing is that it appeals to people who have a kind of feeling of friction with the government. And I have the same feeling every time it's income tax time. [LAUGH] [LAUGH] I know, I know what you mean. So somehow, it would be nice if you could just cut the government out of your life. But the bitcoin, you know this phenomenon that is the, the bitcoins is, is this indicative of anything bigger going on in society or in the markets or is it kind of a, a one off speculative niche? Well big things, big things are happening because of new technology and they will change finance and change everything, but and I, I actually admire people who experiment and bitcoin was certainly a provocative experiment. But I don't think that it's the final product yet. We'll see what happens. [MUSIC] [MUSIC]

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