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Robert Shiller Says A Wild West Mentality Is Gripping Multiple Corners Of The Market & It Could Mean Pain Ahead

Robert Shiller Says A Wild West Mentality Is Gripping Multiple Corners Of The Market & It Could Mean Pain Ahead

Shiller warns that investors’ “Wild West” mentality is pushing stocks, housing, and cryptocurrencies into bubble territory. Here’s what you need to know now.

A few of the hottest corners of the market are now in bubble territory.

That’s according to Robert Shiller, the Nobel prize-winning co-founder of the S&P CoreLogic Case-Shiller Home Price Index and Yale University professor, who is worried now about cryptocurrencies, housing, and stocks.

Shiller said that investors have a “Wild West” mentality when it comes to all three, and while the wild rallies in stocks and cryptos have taken a been taking a breather of late, he sees trouble ahead. Especially for the housing market.

“In real terms, the home prices have never been so high,” Shiller said. “My data goes back over 100 years, so this is something. I don’t think that the whole thing is explained by central bank policy. There is something about the sociology of markets that’s happening.”

The S&P CoreLogic Case-Shiller Home Price Index was out with a report this week that showed home prices in March were 13.2% higher year-over-year – the largest gain since December 2005. That’s up from a 12% annual gain in February and marks the 10th straight month of rising home prices.

Helping to push home prices higher is a record low supply of homes for sale, with only 1.16 million houses for sale in the U.S. at the end of April – down 20.5% from April 2020. Rising costs for land, labor, and lumber and other building materials is also inflating home prices.

Shiller noted that over the past three decades, home prices have been driving housing starts and a pattern is emerging. He added that the current home price action is reminiscent of 2003, two years before a slide in prices began that ultimately culminated with the housing crash during the 2008 financial crisis.

“If you go out three or five years, I could imagine [prices would] be substantially lower than they are now, and maybe that’s a good thing,” Shiller said. “Not from the standpoint of a homeowner, but it’s from the standpoint of a prospective homeowner. It’s a good thing. If we have more houses, we’re better off.”

“We have a lot of upward momentum now,” Shiller added. “So, waiting a year probably won’t bring house prices down.”

On stocks, Shiller says psychology has played a significant role in driving the market higher.

Since the COVID crash bottom on March 23, 2020, the S&P 500 has gained 88%, the Dow has risen 85%, and the Nasdaq is up 100%.

Shiller warns that stocks are highly-priced and inflation fears could likely push long-term assets lower.

Inflation data showed higher-than-expected price pressures in April, with the Labor Department reporting earlier this month that prices rose to an annualized rate of 4.2% last month as the U.S. economy kicked into high gear and energy prices jumped higher. 

When inflation “moves up so much, the Fed has to act,” said Larry Swedroe, director of research for Buckingham Strategic Wealth. “If the market thinks the Fed will tighten when inflation hits, say, 4%, the market will begin reacting well before the Fed does anything. The Fed isn’t clear on what level they might act.”

“Growth stocks have longer duration than value because they have more of their earnings farther out,” Swedroe added. “If you get rising inflation, you have to discount future earnings.”

As for cryptocurrencies, Shiller is on high alert.

Cryptos have been on a wild ride in recent weeks, with Bitcoin down more than 41% since peaking on April 15, wiping out billions in value. Ethereum, XRP, and Dogecoin have all also seen massive declines.

The crypto market is “a very psychological market,” Shiller said. “It’s impressive technology. But the ultimate source of value is so ambiguous that it has a lot to do with our narratives rather than reality.”

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