Nowhere to Hide: Part II

Sometimes even otherwise bright people have a big gap in their common sense.  Absent-minded professors are the stuff of legend, while “pointy-headed intellectuals” have been accused of not being able to park a bicycle straight.

Robert Shiller is a pretty bright guy.  He’s a Yale economics professor (we don’t automatically discount him for that; we prefer to judge him on the merits of what he professes), a Nobel Laureate, and the author of the book Irrational Exuberance.

That book, published right at the top of the dot.com market bubble, made a cogent case the stock markets were over-valued.  A 2005 edition of Irrational Exuberance made the case that the real estate bubble would soon burst.  

We think Shiller is pretty capable, at least more so than the Keynesians and Modern Monetary Theorists found in most college economics departments and on the pages of the New York Times.  So we’re not accusing anybody of anything or calling any names here… just helpfully pointing out where something obvious might have been overlooked.

Shiller is back on bubble patrol, sounding out new warnings.  “I see bubbles everywhere,” he says.  The stock market is a bubble, he says.  The bond market is a bubble.  Shiller even thinks the housing market is in a bubble again.

Using a long-term valuation measure (the CAPE ratio) for stock prices, Shiller says we’re in a market bubble that “you know is going to decline.’  The bond market is just as threatening, he says.  “It seems to be related to people not paying enough attention thinking through the simple logic … this can’t keep going and it’s going to end badly.”

We share his views about both the stock and bond markets.  We have written about the bubbles in both many times.   And without a doubt, when the bond market crashes, it will mean interest rates have risen, which will have a negative impact on real estate.

So what is our problem with Shiller?  It is simple this:  Shiller doesn’t know where to go to escape the carnage of these inevitably bursting bubbles.  

“There’s no place to go,” he says. “You just have to ride it out.”

No.  

You don’t.

This is the second time in recent weeks that we have encountered this meme (see Nowhere to Hide, Part I here).  We aren’t sure yet, but are beginning to grow suspicious that this may be a new focus group-tested talking point or meme contrived by Wall Street: “Sure, the stock market is grossly overvalued, but you have to stay invested in it since there is nowhere to hide.”  We’ll be interested to see if the phrase starts showing up often in the financial press

We’ve had two stock market crashes already in this very young century.  This time, though, the stock and bond bubbles are bigger than ever.  That means the bust will be bigger than ever. 

In any case, Shiller is too despairing when he says that you have to invest in the stock market, “even though you expect the price to decline.”

That is simply bad advice.  It took decades for the market to recover from the 1929 crash.  It took the Nasdaq market 15 years to recover from the dot com crash.

Michael Shedlock of Mish’s Global Economic Forecast also takes a caustic view of Shiller’s advice, that you have to ride it out, that there is no place to hide.

Number one on Mish’s list of places to go is gold.  He says, “I do not care about books or past predictions.  I care about logic of the moment.”

“It is absurd to say there is no place to go,” says Mish.  “Choose wisely where to hide.”

We agree.  Let the professionals at RME Gold tell you about gold and the logic of the moment before the bubbles burst.