Robert Shiller finds himself ending the decade in virtually the same conversation in which he started it.
In early 2000, the Yale University economics professor's soon-to-become hugely influential book, Irrational Exuberance, was about to hit bookshelves – illuminating the world on how market bubbles form and how they burst. The book essentially foretold the popping of the dot-com bubble only a few months later.
Now, in the aftermath of the second major stock market collapse in less than a decade, Mr. Shiller is again being asked to help explain why stocks have become so volatile.
His answers to these question may be even more pressing now than they were in 2000, as investors look back on a “Lost Decade” for North American equities.
After four 50-per-cent-plus moves (two down, two up) in less than 10 years, the S&P 500 ends the decade 24.1 per cent below where it started. The S&P/TSX composite, while faring generally better thanks to the surge in commodity prices, is nevertheless up a modest 39.6 per cent for the decade – less than 4 per cent annualized, and roughly one-third of its annual growth rate through the 1980s and 1990s.
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Now, with wary retail investors 10 years closer to retirement with little to show for it, they want to understand: What's gone wrong?
Mr. Shiller's less-than-comforting answer: We're mostly doing it to ourselves.
“I think it has to do with a different world view that we have adopted. We're much more of an investing culture, all over the world, really, than we were in the past. There's much more of an expectation of volatility.”
Mr. Shiller says our mass psychology is much more one of speculation and risk-taking than it was a generation or two ago. We've come to rely on rising markets to create our wealth and well-being, at the expense of savings.
The result? An increasingly rapid succession of boom-and-bust markets, where an overexuberant herd mentality pushes asset prices to unsustainable limits until something bursts the bubble and we fall to Earth with a sickening thud.
And with more people participating in the markets than ever before, the impact becomes more pronounced each time the mass of expectations shifts from confidence to doubt, and back again.
“People used to look at dividends more than they do now,” he says. “As the years go by, people are more and more focused on capital gains. So it has become more of a game of predicting the swings. And when you have everyone trying to predict the swings – and the swings are caused by people anyway – it creates a fundamental instability.”
Mr. Shiller's focus on the shifting psychology of market participants may seem a bit too fuzzy for investors seeking more concrete causes for the market's mood swings of the past decade. Yet it's hard to dismiss, given Mr. Shiller's enviable track record for identifying bubble mentalities.
Not only did he call the bursting of the dot-com bubble, but a second edition of Irrational Exuberance , published in 2005, warned of continued overheating of the stock market and predicted the bursting of the dangerously bloated housing market.
Still, others point to less esoteric causes for the Lost Decade. The culprit they often identify is debt – the overreliance on borrowed money, made easy by low interest rates, to finance not just investing, but consumers and governments.
