The famed Yale economist's research led to warnings about the dangers of both the dot-com stock mania and the debt-inflated U.S. housing bubble. At 68, Shiller—who won a share of the 2013 Nobel Prize—is still seeking to explain why people and markets behave the way they do.
The first edition of your book Irrational Exuberance came out just before the dot-com bubble burst in 2000. The second edition in 2005 warned about the collapse of the U.S. housing boom. The third edition comes out in February. Should we be worried?
I'm calling the current boom the "New Normal Boom." The Millennium Boom was driven in part by very enthusiastic thinking about the new millennium and the Internet. That's not what I see happening now. Instead, the economy is inherently weak. Wages aren't growing, and people are fearful of the future. That has caused them, apparently, to bid up prices of assets. It's not your classic bubble.
You have said that even past bubbles were often associated with a lack of investor confidence. Yet, people take the plunge anyway.
That's right. Typically in a bubble, there are doubts expressed a lot. People will go through a period of staying out of the market, and it keeps going up. Eventually, they get regretful of having missed out, and they just decide: "I'm going to go into it." And it might be at the worst possible time for some of them.
Where are you putting your money these days?
I'm still in the market, but I'm not heavily committed to it. The fundamental dilemma is that everything looks pricey. Real-estate prices in the U.S. have gone up. The stock market looks high, and the bond market looks high. There are some low-priced countries. China looks interesting, because it has low price-to-earnings ratios. On the other hand, people are uncomfortable about putting a big share of their investment dollars in a country with which our relations are iffy.
What percentage of your portfolio is in equities?
It's changing all the time. It's something like 50%. I still have a lot in fixed income, and then housing—I have two houses.
What are you avoiding?
I haven't been in long-term bonds, although I don't have an ironclad case to stay away from them. But they have very low yields. People are willing to take nothing for 10 years.
What do you pay closest attention to, in terms of economic data, earnings, trends and the like?
I like to read everything and look at all indicators. I'm particularly interested in confidence indicators. I have my own confidence indicators for the U.S. and Japan on my website.
What do they show?
The most notable thing is that what I call valuation confidence has been plummeting. This is confidence that the market is not overpriced. It has fallen, for individual investors, to the lowest level since 2000. So there's a general perception that the market is highly priced.
What does that say about where the market is heading this year?
There's the puzzle. The lowest my valuation confidence index has ever been was right at the 2000 peak. It was much lower than it is now, so maybe it has a ways to go. We don't have enough data on these things to know how to time the market. That's why I'm still in the market. It almost looks as if it's about time for a correction—there are people saying that, but that's totally unscientific. When a market is highly priced and when people don't trust the value of it, that becomes a hallmark of a bubble: People are buying it even though they think it's overvalued. And that's what we're finding.
Any concerns about the markets or the economy that keep you up at night?
Unless there's a horrible crash, I'll be all right. I've invested conservatively, so I have no reason to lose sleep.
Were there times in the past when you suffered from slumber interruptus?
I remember losing sleep in 1987, but it was for a different reason. Oct. 19, 1987, was the biggest one-day drop in the world's markets in history. I didn't get much sleep the next few nights. I wanted to study the phenomenon, and I was organizing surveys to go out to individual and institutional investors right away, because I wanted to know what people were thinking. I was up all night working.
What's your favourite metric?
CAPE (cyclically adjusted price-earnings) ratio—which I created—is the real stock price divided by the 10-year average of real earnings. "It's almost 27 now, very high," he says
What do you think is the least useful metric?
Price-earnings ratio— the price divided by 12 months of reported earnings. "This chart gives many false signals, since one-year earnings are terribly volatile"