Wednesday, September 23, 2015

Bubble Debate; Equity Allocations vs. Shiller PE; Simple World

"Yale University market scholar Robert Shiller entered the bubble debate last week as noted in the Financial Times article Fears Grow Over US Stock Market Bubble. 
 The Nobel economics laureate told the Financial Times that his valuation confidence indices, based on investor surveys, showed greater fear that the market was overvalued than at any time since the peak of the dotcom bubble in 2000.

It looks to me a bit like a bubble again with essentially a tripling of stock prices since 2009 in just six years and at the same time people losing confidence in the valuation of the market,” he said.

Prof Shiller added there was no historical evidence for a link between interest rates and share prices. “You would think that when interest rates are higher people would sell stocks, but the financial world just isn’t that simple.

He defended his now famous measure of valuation, often referred to as the Cape (for cyclically adjusted price/earnings multiple), which compares share prices to average earnings over the previous 10 years. This adjusts for the cyclicality of earnings.

Mr Shiller pointed out the fall in earnings in 2008 came as part of a severe recession. “Companies like to take write-offs right away during a recession. Then their earnings can recover from there. If I average over 10 years I don’t see that as a problem. The average includes the actual losses that companies have made.”

He said changing accounting standards could create difficulties for his model but added: “I think we’re better off with changed accounting standards than if we ignored all the changes that happened since 1871.”
Equity Allocations vs. Shiller PE



at http://globaleconomicanalysis.blogspot.com/2015/09/bubble-debate-equity-allocations-vs.html#sXiJ0qsiU9xcxi1L.99

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