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Nobel Prize Economists Calls High Stock Market Values “Concerning”

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During a recent interview on CNBC’s Power Lunch, Nobel Prize winning economist Robert Shiller called stock market valuations “concerning” and hinted that markets could be set up for a crash.

Several other notable economists have recently expressed concern about surging stock markets, particularly in the US. Marc Faber has predicted “massive” asset price deflation  – possibly of drop of as much as 40% in stock market value. Billionaire investor Paul Singer recently said the financial system is not sound. And former Ronald Reagan budget director David Stockman said we should get ready of “fiscal chaos.” Now Shiller has weighed in, pointing out that market valuations are at “unusual highs” and noting that if history is any indication, it could foreshadow an upcoming crash.

Shiller and fellow economist John Campbell developed the cyclically adjusted price-earnings ratio (CAPE). This come up with this metric, economists divide prices by the average of 10 years of earnings, adjusted for inflation. Using CAPE, economists can assess likely future returns from equities over  10 to 20 year time periods. Higher than average CAPE values imply lower than average long-term annual average returns. There is also a correlation between high CAPE numbers and stock market crashes. Notably, the only times we’ve seen CAPE values higher than they are today were in 1929 and 2000.

The only time in history, going back to 1881, when it’s been higher are A. 1929 and B. 2000. So, we are at a high level, and it’s concerning.”

We’ve been talking about the stock market bubble for a couple of years, noting on numerous occasions that market values are not built on sound economic data, nor strong performance in the business sector. As Yahoo Finance reported last spring, analysis shows that 93% of the entire stock market move since 2008 was caused by Federal Reserve policy. Shiller’s CAPE number underscores this fact. It essentially tells us that the stock market is significantly overvalued when compared to how companies are actually performing.

Shiller said investors should be cautious due to the “high” market value. But like most mainstream analysts, he was careful not to sound the alarm too loudly. Nevertheless, he did offer some wisdom worth considering.

I think one should diversify. One should have a little bit of everything.”

During a recent interview, Peter Schiff was more emphatic. He said now is the time to buy gold.

We’re in the eye of an economic hurricane right now. People think that 2008 was the end of it – that was when we entered the storm. Now we’re in the eye. We’re coming to the rest of the storm shortly. So, for now, it’s just a good time to buy gold while there’s so much complacency.”

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