WealthTrack - Shiller Interview 8.26.11

[chinaco]

Interesting interview... his take on real estate and securities markets.

He interview was tilted toward the negative (concerned) IMO. Of course he hedges his comments and does not predict. But he is clearly concerned that we could be looking at an economy that has some longer term weakness (like the depression). But he does say there is no way to know for sure.... this is a rare event and the great depression is the closest economic event (similar) in the recent past that we can compare it to.

He says fear, anger, and lack of confidence seems to prevail. We run the risk of creating a self-fulfilling prophecy.

He does not make predictions... but his concern is that the great depression (poor economy) languished for just shy of 20 years and was only pulled out of it by a massive government stimulus program (WWII). He seems to imply (by way of comparison and asking the question) that we could be looking at a similar experience.

The current market volatility.... Heavy market volatility in the past has often preceded a very large market drop. He cites 1987 (and previous markets).

His tip: "Hold TIPS- U.S. Treasury Inflation Protected Securities" You can see his rationale in the interview. My paraphrase: few options available to really preserve capital (on a real basis).

He also cites the conventional approach to investing... rebalance!

Consuelo Mack WealthTrack - Home - The Right Track To Your Financial Health


Added: He also states that there are people (I assume finance and economic professionals) that disagree with some of his views. I assume it is his way of saying his concerns may not turn into reality... IOW - YMMV... nothing is certain.

 

[JPatrick]

He says fear, anger, and lack of confidence seems to prevail. We run the risk of creating a self-fulfilling prophecy.

.

I'll buy into this part as it relates to a sustained depressed economy and job market..Although I used the word depressed just now, I don't buy all that depression talk of Shiller's.

A major change of attitude would give us plenty of altitude.

 

[Gone4Good]

He does not make predictions... but his concern is that the great depression (poor economy) languished for just shy of 20 years and was only pulled out of it by a massive government stimulus program (WWII). He seems to imply (by way of comparison and asking the question) that we could be looking at a similar experience.

It seems to me he's unquestionably right on this point. We're now into the 26th month of this 'recovery' and the employment to population ratio is below where it was at the bottom of the recession. Predictions of faster economic growth keep getting pushed back as they fail to materialize quarter after quater. It seems like the models most forecasters use keep predicting a more robust recovery because that is what has traditionally happened. But this isn't a traditional recession. This is an atypical balance sheet recession, and slow growth will likely persist until balance sheets are repaired. We've got many more years to go, I fear.

 

[FIREd]

I think we are in a depression. Unlike during the great depression, we now have social and welfare programs to soften the blow, so it may not look as bad as during it did the 1930s.

Breadlines used to look like that:

Now they look like this:

Much more discrete and not as spectacular...

But I think it will still take years to work our way out of that one.

 

[chinaco]

I don't think anyone will know exactly how to describe this situation until it is over with and analyzed from a historical perspective. Right now they are using past historic economic events to try to explain what "might be" happening.

Hopefully they will be looking back on this later and saying we did the right things.

 

[Gone4Good]

Hopefully they will be looking back on this later and saying we did the right things.

The people who've spent the most time studying the US in the 1930's and Japan of recent decades seem pretty convinced that we didn't learn the earlier lessons. That's probably a bit harsh, because the much-maligned Bernanke Fed has done a fantastic job and is currently struggling against some practical limits. Their ability to move the needle any more by themselves is pretty theoretical. On the Fiscal side we've done some things right (like the much-maligned TARP) but in recent months have lost our will to try anything else. Instead the world's thrown the engines in reverse.

So it looks to me like pretty good policy prevented a Greater Depression, but now we're making some of the same mistakes we made in 1937 . . . which incidentally lead to a painful recession that aborted recovery from the first dip. Sound familiar?

 

[NYEXPAT]

I give tremendous credit to both Shiller and Nouriel Roubini for getting me out before this mess began to unfold. The Fed can only buy the USA a bit more time (QE3), without the political will for the USA to swallow it's medicine.
God bless America and Arriba Peru!

 

[Retire Soon]

One of the biggest problems is that home prices continue to sink even after a five year continuous drop. Our economy will not get back to normal until we reach a bottom, however deep that may be. Robert Schiller mentioned that all of his advisers believe home prices are poised to start increasing once again, but that he did not agree with this prediction. It sounds to me like he may be about as pessimistic as A. Gary Schilling who is more precise in a his projection of a further 20% drop in home prices.

Housing Prices Have Already Fallen More than During the Great Depression ... How Much Lower Will They Go? → Washington's Blog

 

[Gone4Good]

I don't know if comparing the current housing price decline to that of the Great Depression is all that meaningful. Did housing prices increase as much before the GD as they did in the aughts? It seems to me the right question isn't whether prices have fallen more than than in the GD, but rather have they fallen enough given their earlier rise? The attached chart (housing prices adjusted for CPI) says no.

But housing prices aren't really the problem. Debt is the problem. If we deal with the debt, then further declines in housing prices won't really matter all that much.

 

[M Paquette]

I don't know if comparing the current housing price decline to that of the Great Depression is all that meaningful. Did housing prices increase as much before the GD as they did in the aughts? It seems to me the right question isn't whether prices have fallen more than than in the GD, but rather have they fallen enough given their earlier rise? The attached chart (housing prices adjusted for CPI) says no.

But housing prices aren't really the problem. Debt is the problem. If we deal with the debt, then further declines in housing prices won't really matter all that much.

There wasn't specifically a housing bubble, but the total level of debt to GDP managed to reach almost 300%, a figure not seen again until the mid-2000s [1]. Toss in some bank failures ("OMG! We're overextended!"), and suddenly there's a credit squeeze as folks become reluctant to lend (or borrow!).

The credit squeeze causes problems all over. Businesses can't get or maintain a line of credit, and either fold or contract until they can operate without. Assets (stocks, bonds backed by shaky assets) lose value. Profits are pinched off as businesses try to conserve cash in lieu of credit lines. There's a reduction in output, trade activity, and employment. Folks lose confidence. (This is basically a sloppy summary of the conclusions drawn by economic scholars of the Great Depression, particularly the neoclassical economist Irving Fisher. [2])

Sound familiar?

There are various monetary and fiscal policy moves that can be made to reduce the pain of a credit squeeze recession, to try and keep some level of liquidity in the face of a reluctance to lend (or borrow), and keep the economy moving. The Fed in particular has done a pretty good job of avoiding the mistakes of the Great Depression. ("There's a liquidity crisis, so you decided to TIGHTEN and shrink the money supply?!??")

Recovery from a credit crunch is slow. The debt has to be dealt with until consumers and businesses are no longer overextended, and a more orderly money flow is reestablished. That takes years. Many years.


1. http://www.johnmauldin.com/images/uploads/pdf/mwo071811.pdf
See also http://www.gfmag.com/tools/global-database/economic-data/10403-total-debt-to-gdp.html#axzz1WTT16Mwf
2. Fisher, Irving (October 1933). "The Debt-Deflation Theory of Great Depressions". Econometrica (The Econometric Society) 1 (4): 337–357.

 

[chinaco]

There wasn't specifically a housing bubble, ...

In 1929, I think there was a bubble in the stock market due to high amounts of margin investment and speculation.

The people who've spent the most time studying the US in the 1930's and Japan of recent decades seem pretty convinced that we didn't learn the earlier lessons. That's probably a bit harsh, because the much-maligned Bernanke Fed has done a fantastic job and is currently struggling against some practical limits. Their ability to move the needle any more by themselves is pretty theoretical. On the Fiscal side we've done some things right (like the much-maligned TARP) but in recent months have lost our will to try anything else. Instead the world's thrown the engines in reverse.

So it looks to me like pretty good policy prevented a Greater Depression, but now we're making some of the same mistakes we made in 1937 . . . which incidentally lead to a painful recession that aborted recovery from the first dip. Sound familiar?

I think they made some appropriate moves to head off disaster. I suppose there could have been several ways to approach it... they used the TARP program.

Historians will credit Bernanke and Paulson with snatching us out of the jaws (i.e. avoiding) of a ruinous depression.

Apparently in 1930's... the word depression was apparently used to describe any economic downturn. After the great depression some economist have proposed a definition for a depression.

Recession? Depression? What's the difference between a recession and a depression?


But I think what is commonly referred to as the depression is the entire era of the 30's... when the actual economic depression (in modern terms) seems to have only occurred throughout the Hoover administration.

The recovery began in 1933 after FDR took office.

Apparently there was a lot of debate about the government spending program back then.... just like we are experiencing today.

Great Depression - Wikipedia, the free encyclopedia

 

[M Paquette]

In 1929, I think there was a bubble in the stock market due to high amounts of margin investment and speculation.

10% margin! Control $100 in assets with $10 on the table. Gosh, what could possibly go wrong? Wheeee!

 

[ERD50]

Historians will credit Bernanke and Paulson with snatching us out of the jaws (i.e. avoiding) of a ruinous depression.


The recovery began in 1933 after FDR took office.

So you can predict the future?

Hmmm, maybe not so tricky after all - it is pretty likely there will be historians with interpretations on both sides of just about any issue:

FDR's policies prolonged Depression by 7 years, UCLA economists calculate / UCLA Newsroom

Two UCLA economists say they have figured out why the Great Depression dragged on for almost 15 years, and they blame a suspect previously thought to be beyond reproach: President Franklin D. Roosevelt.

After scrutinizing Roosevelt's record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.

"Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump," said Ohanian, vice chair of UCLA's Department of Economics. "We found that a relapse isn't likely unless lawmakers gum up a recovery with ill-conceived stimulus policies."

-ERD50

 

[MichaelB]

Recovery from a credit crunch is slow. The debt has to be dealt with until consumers and businesses are no longer overextended, and a more orderly money flow is reestablished. That takes years. Many years.

Another paper on this; After the Fall by Carmen M. Reinhart & Vincent Reinhart

This paper examines the behavior of real GDP (levels and growth rates), unemployment, inflation, bank credit, and real estate prices in a twenty one-year window surrounding selected adverse global and country-specific shocks or events. The episodes include the 1929 stock market crash, the 1973 oil shock, the 2007 U.S. subprime collapse and fifteen severe post-World War II financial crises. The focus is not on the immediate antecedents and aftermath of these events but on longer horizons that compare decades rather than years. While evidence of lost decades, as in the depression of the 1930s, 1980s Latin America and 1990s Japan are not ubiquitous, GDP growth and housing prices are significantly lower and unemployment higher in the ten-year window following the crisis when compared to the decade that preceded it. Inflation is lower after 1929 and in the post-financial crisis decade episodes but notoriously higher after the oil shock. We present evidence that the decade of relative prosperity prior to the fall was importantly fueled by an expansion in credit and rising leverage that spans about 10 years; it is followed by a lengthy period of retrenchment that most often only begins after the crisis and lasts almost as long as the credit surge.

It took 10 years to happen and it'll take another 10 to recover.

 

[chinaco]

So you can predict the future?

Hmmm, maybe not so tricky after all - it is pretty likely there will be historians with interpretations on both sides of just about any issue:

FDR's policies prolonged Depression by 7 years, UCLA economists calculate / UCLA Newsroom



-ERD50

Nope. Can't predict the future... Just my opinion.

There will always be someone that claims to have some superior insight after it is over (with the advantage of hindsight).

ERD you are mixing together a number of events and outcomes that occurred over more than a decade.

I am talking about the financial calamity that occurred after the stock market collapse. Financial system collapse... massive bank failures.

Most of that happened during the Hoover Administration. 10,000 banks failed before FDR was in office.

Bank Failures Cause the Great Depression

This time the feds stepped in and stopped a complete meltdown. GWB made a swift move (and IMO a smart decision).

Of course, Paulson and Bernanke were the guys assessing the situation and trying to deal with it.

 

[Gone4Good]

it is pretty likely there will be historians with interpretations on both sides of just about any issue:

Upton Sinclair said it best . . .

"It's difficult to get a man to understand something when his job depends on not understanding it."

That doesn't mean each side's argument is equally valid, or indistinguishably so.