Robert Shiller on Recession Risk, 2020 Democrats and Fear Itself
Bloomberg – It’s a famous adage on Wall Street that markets are sending mixed messages this year: Bond investors and trade-war worrywarts tell stories of economic doom, while stock traders recite bullish tales about Corporate America.
Maybe we should all read Twitter instead.
To Nobel Prize winner Robert Shiller, ideas that go viral are more important than you might think for predicting where an economy is heading — as much as growth figures and asset prices.
In his latest book “Narrative Economics,” the 73-year-old famed for his analysis of asset bubbles argues stories can turn into self-fulfilling prophecies with the kind of potency that mainstream economics often overlooks.
With trade headwinds dampening international growth while most measures show U.S. output in rude health, it’s a theory whose time may have come.
The good news is that the odds of a recession in 2020 are less than 50%, Shiller said in an interview with Bloomberg News at London’s Ned Hotel.
“In September 2008, we had the Lehman bankruptcy and the WaMu takeover and talk then shifted to, is this 1929 again?” he said. “It brought back fearful stories, but right now those stories aren’t so prominent.”
In a wide-ranging interview, Shiller said he’s rooting for Joe Biden to be the Democratic presidential candidate and eventual victor in next year’s election, although he confesses he’ll take any contender over Donald Trump.
The left-wing ideas of Bernie Sanders and Elizabeth Warren, like raising taxes on the wealthy, are going to make winning a national poll difficult and would hurt the stock market, he warned.
The transcript has been edited and condensed for clarity.
Why are stocks and bonds both near historical highs?
My view of the world is driven by multiple narratives. Why would someone bid up the price of bonds and not bid down the price of stocks? Prices are set by the people who trade, and so we can get contradictions in the data.
Near-record low or even negative bond yields have something to do with the fear of other investments. It also has to do with the secular stagnation narrative or recession narratives.
Which narratives are popular today?
There’s this secular stagnation narrative, or a Japan-now-expanding-to-the-world narrative, which sounds superficially plausible. Almost no one forecast that the current low interest-rate regime would still be around in 2019, so ask me again in 10 years and I might have a forecasting model.
What could make volatility rise again?
It could be a return of a narrative that inspires fear, as happened in 2008. Volatility shot way up. There was a return of the Great Depression narrative. In September 2008, we had the Lehman bankruptcy and the WaMu takeover and talk then shifted to, is this 1929 again?
It brought back fearful stories, but right now those stories aren’t so prominent. People aren’t so worried about the stock market. They’re interested in other things, like Donald Trump or Boris Johnson.
Will the next U.S. recession be major or mild?
The natural answer is that it won’t be as bad as the 2008 one. Because that was like the worst recession! The question is what would make it bad. It would be some kind of scary narrative that comes back with new force, like a Great Depression narrative, or even the 2008 narrative coming back.
In the U.S., confidence has held up pretty well. It hasn’t been growing rapidly, but it’s still up there so people are not scared. And that means that many people are just not paying attention to their stock portfolio.
Is there a bubble in passive investing?
Passive investing might allow bubbles to grow stronger. On the other hand, we still have a lot of active investors, and I don’t know that I’m particularly alarmed. It’s true that attention has shifted away from individual stocks to indexes. Smart-beta ETFs are an attempt to correct for that.
Will Trump dial down the trade-war talk ahead of the election?
Trump has a great respect for his own gut feelings, and he doesn’t listen to any particular authority. So I’m thinking he’ll get even wilder as his approval ratings go down.
Who is your preferred candidate for 2020?
I tend to prefer Biden because I think he has the best chance of winning. That’s where his support comes from. I’d take any of them over Donald Trump.
Bernie Sanders’s strength in the last election is surprising because he calls himself a socialist and that’s a bad, obscene, dirty word in the U.S. I don’t think Bernie Sanders is going to win. Elizabeth Warren is a smart woman, but she’s a little bit left wing to be elected in America. It would be a surprise victory.
How would a Warren or Sanders victory affect stocks?
The problem with Sanders and Warren is that they want to put taxes on wealthy investors. That should harm the market. At the same time, the market isn’t always logical.