January 31, 2011
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I apologize for the Robert Shiller overload lately but he has done a number of recent interviews and has some interesting things to say. In my opinion, he nails the long-term macro scenarios better than most. The best quote from the interview:
Maybe this is my hubris, but I imagine I could make a lot of money investing — if I put my mind to it and stopped focusing on these big aggregates as I do. But I’m not, I’m an academic and I’ll let other people get rich. I don’t know what I would do with the money anyway.
He goes on to say he thinks we will see another recession sooner than later:
RS: I think that’s definitely possible because the unemployment rate is very high now and it’s not going down very fast, so I’m still calling for a double-dip. I mean I wish we didn’t have it, but that’s what I always meant. Nobody ever defined double-dip anyway, if you look at history the only example that looks credible for what people seem to be talking about was the 1980, 81 and 82 recessions, it was less than a year between them. But we’ve already made sure that we’re not going to have that because we’ve already passed the time limit.
On the PE ratio:
BI: But you do think P/Es will ultimately regress back to the mean?
RS: Possibly, yes. There’s two ways price-earning ratios can regress to the mean. One is, the price can go down (the numerator) and the other is the denominator should go up. Efficient Markets theory says that it’s going to be the latter — because you can never predict price. High price earning ratio is in itself a prediction. But in the study I did with John Campbell we looked at which one it has been historically and I’ll tell you, and hands down price does it. Price-earning ratio does not predict earnings growth. So, yeah, I think that the most likely scenario is that sometime over the next ten years is we will see a big downward correction. I just don’t know exactly when.
How he is invested:
BI: So, what are you doing with your own money now?
RS: Well I have it kind of diversified. It seems like everything is overpriced: stocks, bonds, and real estate. And index bonds were given a negative yield recently; maybe they’re coming back. Nothing looked attractive. There must be some people who can find attractive investments. But I’m really a professor, interested in broad issues. The question of whether you should put it in a hedge fund with an expensive manager. I think maybe you should, but only if you can judge managers right. I don’t think you should put it in a random one. Maybe this is my hubris, but I imagine I could make a lot of money investing — if I put my mind to it and stopped focusing on these big aggregates as I do. But I’m not, I’m an academic and I’ll let other people get rich. I don’t know what I would do with the money anyway.
Read more: http://www.businessinsider.com/henry-blodget-robert-shiller-exclusive-davos-2011-1#ixzz1CfKUIccN
January 29, 2011
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January 3, 2011
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Robert Shiller was on CNBC New Year’s Eve to make his forecast for the S&P 500 index in 2020. His best guess is a 1430 level which works out to 14% price appreciation over the next ten years or 1.3% annually. Taking no issue with the P/E multiple he uses but only analyzing the earning forecast I believe he may be slightly optimistic. He arrives at the 1430 level as follows:
- Real earnings in 2020 are 78.20 per share. He is assuming real earnings growth of 1.5% per year which is the long-term average.
- CAPE (cyclically adjusted price earnings) or PE10 ratio of 15. This is the 1890-1990 average P/E. He excludes the “bubble” years of 1990-2010 which would inflate the average P/E to 16.
- Annual inflation of 2%
- Result is a 1430 level on the S&P.
This is hardly an overwhelmingly optimistic forecast but Read more of this post