America should brace for a final blow-off surge in stock markets akin to the last phase of the dotcom boom or the “Gatsby” years of the Roaring Twenties, followed by a cathartic crash and day of moral judgment, according to a Nobel prize-winning economist.
Prof Robert Shiller said the psychological “narrative” behind Donald Trump is powerful and likely to carry Wall Street to giddy heights before the aging business cycle finally rolls over.
He is telling people that it is alright to flaunt your wealth, that it is OK to do whatever you want
“I think there will be a Trump boom for a while. Stocks look high, but they are not yet super-high. In 2000 the (Cape Shiller) price-earnings ratio was over 45 and we may see a repeat of that,” he told The Daily Telegraph.
The Cape Shiller P/E index measures the average earnings of S&P 500 equities over 10 years in real terms, and is closely watched by investors as a gauge of underlying value. It is trading at roughly 25. This is the highest level in over 130 years, excluding the two anomalies of the late 1990s and 1920s.
The U.S. property market is recovering, but the mood among buyers is nothing like the subprime fever in 2005, when median expectations were for price rises of 12 per cent a year for the next 10 years, and the spread above mortgage rates was 6 per cent. “Today the spread is zero,” Shiller said, speaking at the World Economic Forum in Davos.
He believes the prospect of a Trump White House is a “horrible nightmare”, calling the incoming president a dangerous adventurer bent on a nuclear arms race that will draw the world into a spiral of conflict. But nobody, he said, should underestimate the Trump effect on the “animal spirits” of Americans.
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“Trump is a phenomenal motivational speaker. He may not be my taste, but he is telling people that it is alright to flaunt your wealth, that it is OK to do whatever you want,” he said.
Shiller said recessions happen because of a collective “narrative”, a story that takes hold. People spend less. They postpone buying a new car. Small businesses put off hiring. The effect snowballs into a serious downturn.
Shiller, who won the Nobel Prize in 2013 for his “analysis of asset prices”, said the economics fraternity has neglected the potent effects of human mood and social shifts in driving the ups and downs of financial cycles.
Janet Yellen will be gone by the end of the year and then he will ‘pack’ the Fed
Dry modelling of fiscal and monetary data miss the force of these tidal waves, he suggested, which is why central banks and economic authorities are so often caught flat-footed. However, he added that the Trump effect will by reinforced by his Keynesian stimulus of tax cuts and infrastructure spending.
Shiller believes Mr Trump will not allow the U.S. Federal Reserve to hold back his boom by raising interest rates. “Janet Yellen will be gone by the end of the year and then he will ‘pack’ the Fed.” He compared Trump’s ideology to the now forgotten Calvin Coolidge, president from 1923 to 1929, remembered only for his laissez-faire views and declaring that “the business of America is business”.
Trump’s “go out and spend” mantra may entice, but does the economist feel it will sate voters long-term? “Their support is not unconditional. Once things go wrong, I fear that things could turn very bad for the markets,” he said.
“What happened after 1929 is a sobering tale. American attitudes changed abruptly. People cut back on spending and this compounded the effects of the depression. There was a collective repudiation of what had gone before.
“There is a strong narrative to the Great Crash. People saw it as the day of judgment on the 1920s, and I think we could see a repeat of that. The public will reject Trump’s policies and what he stands for,” he said.
Shiller’s Nobel colleagues doubt the Trump era will produce a boom at all. One after another lambasted him at the annual meeting of the American Economic Association last week, warning that his policy mix will add little net stimulus, further entrench inequality, and risk a calamitous trade war. So far the markets do not seem to agree.
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