InterviewRobert Shiller: "The economic success of a country depends on people's belief in ultimate justice - not on the whims of an autocrat"
Interview
Robert Shiller: "The economic success of a country depends on people's belief in ultimate justice - not on the whims of an autocrat"
The Nobel Laureate who predicted the dot-com bubble burst and housing market crash in 2008, says that he does not foresee an imminent recession, and also says that he regrets not signing a letter criticizing Israel’s judicial overhaul
"We are in a unique time in history. This was the biggest economic reaction to a pandemic, perhaps only comparable to the Influenza pandemic during World War I. I think that the experience of the [Coronavirus] pandemic combined with an internet-oriented technology has changed our way of thinking and it’s going to have economic effects,” said economist and Nobel laureate Professor Robert Shiller.
Shiller notes that following World War II, “economists predicted that the economy would slip into a depression again” similar to what happened in the Great Depression of the 1930s because the indicators were similar. “But this turned out to be absolutely wrong - the world economy recovered. It happened because people wanted to have fun again, and put this nightmare behind them. I see several parallels between the situation then and the situation today, after the coronavirus has ended.”
In a special interview with Calcalist, Shiller also spoke about the American economy and global recession. Global markets have been somewhat volatile of late. While there have been some signs for optimism, including the S&P 500 making a gain of 7.5% while Nasdaq jumped by 16%, concerns regarding a recession have returned.
Shiller received the Nobel Prize in 2013 alongside professors Eugene Fama and Lars Peter Hansen for asset price analysis. Shiller is one of the founders of the field of behavioral finance, and one of the developers of the Case-Shiller index for measuring U.S. real estate prices. Prior to receiving the Nobel, Shiller earned renown for accurately predicting the bursting of the dot-com bubble in the early 2000s as well as the crash of the housing market on the eve of the financial crisis in 2008.
In recent years, Shiller has advocated “narrative economics,” counter to most economists who have been warning of an unprecedented recession for more than a year. Many classical economists find it difficult to reconcile the economic data and the narratives, or stories, that occupy humanity in a given period. Such a narrative could be, for example, the coronavirus pandemic, artificial intelligence or cryptocurrencies. In his book "Narrative Economics," published in 2019, Shiller presented his theory arguing that economists are mainly successful in making short-term forecasts of only a quarter or two, but historically have consistently been wrong about annual forecasts.
Shiller is sure that the crisis of small and medium-sized banks in the US, which has occupied the markets and economists since the collapse of Silicon Valley Bank a month ago, is an old narrative disguised as something new.
Regarding the banking crisis, what is the leading narrative today?
"The current banking crisis is another incarnation of the classic crisis narrative," says Shiller. "In my book 'The Narrative Economy' I talked about continuous narratives that grow and disappear in different periods, like a variant of the flu or Coronavirus. Every outbreak of such a narrative corresponds to the curves of a known epidemic or storm. Therefore, I do not regard the current event in the banks as a black swan. From the point of view of the markets, we have already had many of them."
He also sees the AI revolution with the launch of ChatGPT as a story that has already been told, and is as cyclical as the banking crisis. "Even during the Great Depression, there was talk of people being replaced by machines, and this was one of the threats discussed then, although it may seem to us that today we are experiencing something new. According to economists, [technology] was always a path to disaster…but it always turned out that there were other jobs for people who lose their original jobs," reassures Schiller.
Does the current narrative tell you that despite concerns there won’t be a recession?
"Our ability to forecast recessions is limited; it's like weather forecasts - primarily good for a few days and not so good after that. Economists have success in forecasting recessions that are imminent - we’re not quite there yet. I’m suspicious of any confident forecasts about what will happen now.
"The CAPE ratio is today at a high level, similar to what it was in 1929, but not as high as in 2000. On the other hand, in 2021 the index was even higher and the interest rate was lower. In December 2021, the index stood at 39 points, then it dropped to 28 and today it is around 30 points. But you have to remember that in 2000 the index stood at 45 points."
Shiller bases his cautious optimism on the index he developed, the Case-Shiller index, which has become a popular tool for checking the pricing of companies in the S&P 500. The index weighs the value of companies in relation to a moving average of profits over a decade, adjusted for inflation. Another index that Shiller uses is regarding excess return on stocks, which is also derived from the CAPE ratio compared to the yield of U.S. 10-year Treasury bonds.
"The current level of the index shows that throughout the next decade stocks will still give an excess return compared to bonds, but not at the levels they were in recent years. Throughout the last 200 years, stocks have always given an excess return, and therefore one must not avoid stocks out of fear," says Shiller. "According to the index, throughout history there have been almost no situations where it was not worth investing in stocks, with the exception of 1931 and 2001. The historical average of the excess yield is 4% and today we are at a little less than 3%, which means that the shares are still attractive but less than the average."
Is it possible to understand from the indicators whether the bottom is already behind us?
"I don't know how to determine it," he laughs, "but according to the indicators, the market is more attractive than it was in 2019, for example."
So the situation still looks pretty scary. Are we in a bear trap?
"I don't know about the trap. For long-term investors, this is not a bad ratio and it means that there will be significant positive returns in the future. For investors who are worried, and you should be worried to a certain degree when the cap is at 30, the advice is to invest in sectors where the cap ratio is lower. We look at each sector separately. For example, real estate and technology are relatively cheap now. If we look back 30 years, the technology industry today is quite profitable and therefore also looks cheap.”
What do you think about real estate prices today and what dynamics do you see there?
"It is easier to predict real estate prices through the share prices of the companies that deal in this field, because the private market is amateurish. The fact that you bought your own house does not make you an expert in predicting real estate prices. In the U.S., we have recently seen a sharp turn and I think that the drop in real estate prices, at least in real terms, will continue."
What is expensive today?
"The healthcare sector is expensive, utilities and energy."
How important is the war between Russia and Ukraine today? Will it still influence the markets and continue to cloud the global economy?
"Yes, it certainly still has an effect and may continue to have an effect, because it is difficult to predict the psychology of this war and the reactions to it. In 1934, the German writer Johannes Steele wrote a book called 'The Second World War' and he described a world war that actually began in 1934. Because that was five years before the war actually started, the book was seen as a curiosity. But I read it today and came to the conclusion that if the readers and decision makers of the world had taken this book and its messages seriously, perhaps the Nazis could have been stopped at earlier stages by understanding their true intentions. When the words were written, it didn't seem like a possible reality and I can't say where we are today in terms of the distance from World War III."
In Israel today there is a struggle for the future of the country. Many fear that we are on the verge of a regime change whose consequences will be dramatic, not only on the economy. We did not see your name among the signatories of the Nobel laureates' letter. Why?
"I got an invitation to sign the letter of Nobel laureates that was critical of Netanyahu and the proposed new judicial laws that would weaken the power of the courts. I thought of maybe signing it, but in the end I didn’t. And that’s because I am not an expert on Israel and I thought that I should reserve my signature for things that I have real expertise in, and I’m not an expert on constitutional law.”
He did add, however that, “there is undoubtedly a correlation between democracy and a prosperous economy and my sympathies are with the letter writers. The economic success of a country depends on people's belief in the ultimate justice [of the institutions and the government] and not on the whims of an autocrat."
