EDITOR NOTE: The great “mythos” of the American Wild West still, in one way or another, defines the American spirit--the thrill of rugged individualism, independence, and risk-taking that, historically, “made America great” once upon a time. In today’s markets, from real estate to stocks to cryptocurrencies, the original thrill and risk-taking of Wild West adventure still underpin the spirit of American speculation. What’s largely missing, however, is the individualism and independence that once powered it, as most speculators today resemble less the figure of the pioneer than the herd of buffalo that once dominated the plains. The Wild West was defined by real land with real prospects. Today’s financial world is largely defined by prospects on land owned by the government where “fiat values” are its main crops and most speculators are both the sharecroppers and consumers. The real values of gold and silver still exist--they can still be prospected, mined, stored, and traded. But that’s what pioneers do, not buffalo. It takes rugged individualism to be a pioneer, or more specifically, to be among the smart money crowd. It takes following mainstream opinion to simply be among the herd.
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 has 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.
Shiller, who viewed stocks as highly-priced going into the year, warns inflation fears could ultimately push long-term assets lower.
Crypto’s ‘ultimate source of value is so ambiguous’
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.”
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.
Originally posted on CNBC