Re-Blogged From http://reports.pmcapital.com.au
Legendary Economist Robert Shiller is Worried. Maybe You Should Be Too.
Robert Shiller, renowned economist, Yale professor and Nobel Laureate, is worried about the over-priced stock market. So much so that he is refraining from adding to his own stock positions. One factor, among many, that he says makes him nervous is the CAPE ratio. A recent Bloomberg article notes that while the CAPE metric is still about 30 percent below its high in 2000, it shows stocks are almost as expensive now as they were on the eve of the 1929 crash. “The market is way over-priced,’’ Shiller says. “It’s not as intellectual as people would think, or as economists would have you believe.’’
The CAPE ratio, also known as the Shiller PE Ratio, is a price earnings ratio based on average inflation-adjusted earnings from the previous 10 years. It was developed by Shiller and became very popular back in the dotcom bubble, when he rightly predicted that equities were way overvalued. He is saying the same thing now. When stocks are overpriced and expensive, they typically fall a lot harder and farther when there is a market correction or recession, which is a strong possibility.
CAPE RATIO ON THE RISE
As seen in the chart below, the CAPE ratio is climbing, and that is worrying many investors. While non-volatility seems to be currently shielding a major downturn, it is becoming irrational, according to Shiller, as some traders and investors are ignoring clear warning signs and uncertainties ahead. Some argue uncertainty is the new norm, but it only takes as few major hiccups and dips to begin the avalanche of the correction that many are predicting will happen. Are you prepared with a diversified portfolio if Shiller is right? Do you have hard assets as a safe haven against huge market risk? It’s important to be savvy in preserving your wealth.