Wild West Mentality: Loose Money, FOMO, Bubbles, Crypto, Housing, Gold And Inflation

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by confoundedinterest17

Robert Shiller had an interesting interview with CNBC entitled ‘Wild west’ mentality is gripping housing, stocks and crypto”

Nobel prize-winning economist Robert Shiller is worried a bubble is forming in some of the market’s hottest trades.

He’s notably concerned about housing, stocks and cryptocurrencies, where he sees a “wild west” mentality among investors.

“I haven’t done that in print. I’ve been saying that,” the Yale University professor told CNBC’s “Trading Nation” on Friday.

Even though the record run in stocks and cryptos have been taking a break over the past couple of weeks, Shiller is worried. He’s particularly uneasy about the latest housing boom.

“In real terms, the home prices have never been so high. My data goes back over 100 years, so this is something,” said Shiller, co-founder of the S&P CoreLogic Case-Shiller home price index. “I don’t think that the whole thing is explained by central bank policy. There is something about the sociology of markets that’s happening.”

Over the past three decades, Shiller finds home prices seem to be driving housing starts. He’s seeing the pattern emerge again, and highlights it in a special chart.

“We have a lot of upward momentum now. So, waiting a year probably won’t bring house prices down,” Shiller said.

According to Shiller, current home price action is also reminiscent of 2003, two years before the slide began. He notes the dip happened gradually and ultimately crashed around the 2008 financial crisis.

“If you go out three or five years, I could imagine they’d [prices] be substantially lower than they are now, and maybe that’s a good thing,” he added. “Not from the standpoint of a homeowner, but it’s from the standpoint of a prospective homeowner. It’s a good thing. If we have more houses, we’re better off.”

Shiller, an expert in how our emotions drive financial decisions and author of “Narrative Economics: How Stories Go Viral and Drive Major Economic Events,” also sees mass psychology playing a big role in the epic stock market rebound.

Since the March 2020 low, the S&P 500 and Dow are up almost 90% while the tech-heavy Nasdaq is up just over 100%.

Shiller, who viewed stocks as highly priced going into the year, warns inflation fears could ultimately push long-term assets lower.

The cryptocurrency market is putting Shiller on alert, too.

That’s a very psychological market. It’s impressive technology,” Shiller said. “But the ultimate source of value is so ambiguous that it has a lot to do with our narratives rather than reality.”

Even Shiller has been tempted.

“I was thinking of buying them to experience the effect. A lot of people do that actually,” he said. “I never bought bitcoin. Maybe I should be active in that market.

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Based on bitcoin’s latest wild swings, some of the enthusiasm may be evaporating. As of Friday’s close, it’s down more than 30% over the past two weeks.

Yes, compared to the S&P 500 index, cryptocurrencies Bitcoin and Ethereum have had a bad couple of weeks.

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While the cryptos are having a bad time, gold and silver have been regaining ground.

Speaking of Shiller and possible bubbles, the Shiller CAPE (cyclically-adjusted Price/Earnings) ratio is climbing to its highest level since the dot.com bubble and burst.

The Buffet Indicator (Market Cap to GDP Ratio) is at an all-time high since 1950, exceeding the dot.com bubble.

Inflation? The Consumer Price Index is rising at 4.2% YoY, but existing home sales median price is growing at 19.1% YoY. Its a good thing for the Federal government and Federal Reserve that home prices are not explicitly included in the measure of Consumer Price Index. Otherwise, inflation would be in double digits and The Fed would be forced to raise rates.

Of course, assets like housing are susceptible to behavioral issues like FOMO (Fear of Missing Out). That was an issue during the housing bubble of the 2000s before the crash. FOMO may also explain cryptocurrency prices, and precious metal prices.

If Shiller wants to use the Wild West analogy, I assume that Bernanke, Yellen and Powell are the Sheriffs. Unfortunately, The Fed’s sheriffs are more like Sheriff Link Appleyard from The Man Who Shot Liberty Valance.




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