Yale economics professor Robert Shiller won the Nobel prize for his work on bubbles. He wrote a seminal book on speculative manias, Irrational Exuberance, a deep analysis of the dramas overheen the centuries when otherwise sane people drove prices for tulips, stocks, and houses to inexplicable heights.
Shiller developed some of the devices that are considered vital for taking a sober look at markets. He helped create indexes for measuring real estate prices and his stock market valuation indicator, the cyclically adjusted price-earnings ratio, or CAPE ratio, is seen spil one of the best forecasting models for stock comes back.
Spil Shiller sees it, &ldquo,big things toebijten if someone invents the right story and promulgates it.&rdquo, Quartz spoke with him about some of the frothiest assets today, from bitcoin to tech stocks. The conversation wasgoed edited and condensed for clarity.
Quartz: What are the best examples now of irrational exuberance or speculative bubbles?
Shiller: The best example right now is bitcoin. And I think that has to do with the motivating quality of the bitcoin story. And I&rsquo,ve seen it te my students at Yale. You embark talking about bitcoin and they&rsquo,re excited! And I think, what&rsquo,s so titillating? You have to think like humanities people. What is this bitcoin story?
It starts with Satoshi Nakamoto&mdash,recall him? The mysterious figure who may or may not be real. He&rsquo,s never bot found. That has a nice mystery quality to it. And then he has this clever idea about encryption and blockchain and public ledgers, and somehow the idea is so powerful that governments can&rsquo,t even zekering it. You can&rsquo,t regulate this. It kleuter of fits te with the angst of this time te history.
If you look at the third edition of Irrational Exuberance, I&rsquo,m arguing that there&rsquo,s a fundamental deep angst of our digitization and computers, that people wonder what their place is te this fresh world. What&rsquo,s it going to be like te Ten, 20, or 30 years, and will I have a job? Will I have anything?
Somehow bitcoin fits into that and it gives a sense of empowerment: I understand what&rsquo,s happening! I can speculate and I can be rich from understanding this! That zuigeling of is a solution to the fundamental angst.
So I&rsquo,m attempting to deconstruct the bitcoin story. Big things toebijten if someone invents the right story and promulgates it.
So is bitcoin a bubble, or the thickest bubble?
I don&rsquo,t know how to quantify that. But I have a sense that something is arousing to you. Another thing that is arousing to people now is Donald J. Trump. You may have heard of this man.
It&rsquo,s just amazing how he predominates and I think he has a genius at recognizing stories and listening to his audience and understanding what drives them.
He too is related to this fundamental angst that wij have about where are wij ter this digitized society&mdash,international and digitized. And it&rsquo,s that angst that he spoke to, and he introduced a story that involves you, the voter, spil a success ter this fresh world, and that&rsquo,s why the Trump story wasgoed so popular.
There indeed are idea epidemics.
Something you&rsquo,ve written about is the role of media te speculative bubbles. Te the past, you didn&rsquo,t seem coaxed that the internet has boosted the media&rsquo,s capability to do that. Has that switched?
The big thing that happened wasn&rsquo,t the internet. It wasgoed the printing press, Gutenberg ter the 1400s. It didn&rsquo,t truly get going until the 1600s. It wasgoed then that wij embarked observing bubbles.
The problem with things going viral is that there has to be some transmission that&rsquo,s adequate to the job. You can still go viral without newspapers, but it&rsquo,s tighter. There were celebrities and international starlets, like Homer, who wrote the Iliad and the Odyssey. He did that by traveling from town and town and reciting his books. And it worked! He&rsquo,s still going, long after he died.
Things have always gone viral, it&rsquo,s the nature of civilization, but it got stronger with the printing press, much stronger. And then around the 1600s they invented the idea of weekly newspapers that told you what happened this week. And that indeed went like wildfire. People loved newspapers.
The internet takes it to another dimension. But I have a sense it&rsquo,s not spil significant spil the printing press.
Hasn&rsquo,t the internet democratized information? Someone can promote their views widely without getting buy-in from editors or other gatekeepers? That&rsquo,s what Trump has done with Twitter.
One indeed significant thing that&rsquo,s happened is that reputations don&rsquo,t seem to matter spil much at this point te history. Maybe it will come back. You have news media that have developed their reputation for honesty and integrity. And something that&rsquo,s gone viral is a conspiracy theory that the news media, the mainstream media, are ter a conspiracy, and it&rsquo,s embellished ter crazy ways like the Rothschilds or George Soros, or somebody, are ter a conspiracy to ruin America and have bought the media and are controlling them. Those are the extreme, crazy forms of the narrative.
But there&rsquo,s also a more general narrative that liberals are somehow soft and can&rsquo,t treat reality. This is another narrative.
You&rsquo,re asking about bubbles. Thesis are the stories that drive the bubble. Trump speaks to thesis things, and he seems to be telling things that nobody else will say but maybe you&rsquo,re thinking.
He also legitimizes wealth. It wasn&rsquo,t that long ago that wij held rich people te contempt. Wij have a billionaire voorzitter, and he&rsquo,s kleintje of welcoming: You can be rich, too. The Trump story helps inflate all kinds of bubbles, not just bitcoin. I think there are aspects of a housing bubble, and a stock market bubble right now.
Are your feelings on the stock market based on the CAPE ratio?
The CAPE ratio is just one indicator I&rsquo,m particularly known for. I have another indicator you can find on my webstek that not many people pay attention to. Since 1989 I&rsquo,ve bot doing questionnaire surveys of both individual and institutional investors. I&rsquo,ve bot doing this a long time without getting much notice for it. But I believe te it, somewhat, however I don&rsquo,t think it answers everything.
I have something I call a valuation confidence index. I don&rsquo,t have it indeed up to date because it&rsquo,s only a six-month moving average based on petite surveys. Maybe I should expand my size.
But valuation confidence is at the lowest it&rsquo,s bot since around 2000. Ter other words, people think the market is very valued. They don&rsquo,t have to look at CAPE. People think it. I know that. Both individual and institutional investors. Wij are ter a time of mistrust of the market.
The only time mistrust of the market wasgoed lower since 1989 wasgoed ter 2000. So around 2000, the peak of the dot-com bubble. It seems like the mindset is somewhat similar to the dot-com mindset. And that brings us to the FANGs [Facebook, Amazon, Netflix, and Google], spil well. High-tech companies are very likely more arousing, spil they were te 2000.
The year 2000 wasgoed kleuter of like 1849. That wasgoed the gold rush. It truly created a viral explosion of dudes going out westelijk te 1849 looking for gold. Now is the time, you can&rsquo,t wait until 1850! You have to do it now! It wasgoed the same thing te 1999 or thereabouts, when stories of some internet companies were coming out and people said, you know, this is the future, thesis guys are going to take overheen.
Usually thesis stories have an factor of truth to them, but the question is how rapid is it going to toebijten, and what&rsquo,s a realistic view for investors. And they got ahead of themselves with the dot-com bubble.
Wij&rsquo,re maybe doing that again with the FANGs.
Well volatility is very low, both actual and projected ter the VIX. So, why is that?
Some people say it&rsquo,s because of central handelsbank accommodation.
I tend to think of it spil something that reflects the quality of the narrative, which is not encouraging a loterijlot of trading activity now. I&rsquo,m guessing&mdash,I can&rsquo,t tell you why it&rsquo,s low.
One thing I emphasized te my book Irrational Exuberance is attention is capricious. There&rsquo,s a social onderstel for attention. Wij all concentrate our attention ter the same way. Like wij&rsquo,re all watching Donald J. Trump. When Houston floods, well that&rsquo,s got our attention. But part of the story has to be what Donald J. Trump said about it.
Somehow the attention is elsewhere than day-to-day motions of the stock market. It could abruptly switch.
I recall ter October 1987. That wasgoed the fattest one-day stock market druppel everzwijn. How did I hear about it? I wasgoed training my lecture ter the morning. I noticed that one or two students were listening to transistor radios. Eventually one of them raised his mitt and said, &ldquo,Do you know what&rsquo,s going on? There&rsquo,s a historic stock market crash.&rdquo, That&rsquo,s how you hear about it. It all of a sudden grabs people&rsquo,s attention. And it&rsquo,s just not there right now.
Monetary policy has entered a fresh staatsbestel. The only historical precedent for when rente rates were low for anything like this long wasgoed ter the 1930s, the Superb Depression, and how did that end? It ended with World War II.
It doesn&rsquo,t tell you what&rsquo,s going to toebijten now. Why are long-term rente rates so low? It&rsquo,s a big thing. It&rsquo,s bot trending down since 1982. There&rsquo,s bot a downtrend around the world te long-term real rente rates.
And it&rsquo,s nothing particularly to do with the financial depressie. News media like to tie things te with already popular narratives. The natural instinct of a newspaper reporter is to tie it back to that, but it&rsquo,s bot going on longer than that.
I don&rsquo,t have any unique insight into why rente rates have gone down. But I know they&rsquo,re vulnerable to switching narratives.
No, what is an initial coin suggesting?
It&rsquo,s like using a crypto token, not bitcoin itself but the blockchain architecture, and issuing thesis virtual encrypted tokens almost like shares, even tho’ they say they&rsquo,re not shares.
How is it different from bitcoin?
It&rsquo,s somewhat like crowdfunding. Say you&rsquo,ve commenced a drankbuffet, and you want to fund it by issuing thesis tokens. A token is worth one fecali, but your tapkast will only everzwijn serve a set number of beers. If people think it will be a indeed hot caf, the value of the tokens trades for up to $100 or $200. People are raising hundreds of millions of dollars this way, with pretty lean business plans.
Yeah, that&rsquo,s a classic bubble. I&rsquo,ll have to read about that. There are a loterijlot of cryptocurrencies but they don&rsquo,t have spil good a story spil bitcoin. Maybe there&rsquo,s a fresh narrative. Maybe this is a more viral story.
You&rsquo,re making mij think about writing something about this. You have my thinking going.
Related movie: Bitcoin Get Sender Address