The Tell: Shiller: We need a rate hike soon to pop ‘new-normal’ bubbles

There’s only one way to deal with the speculative bubbles that exist in the housing and asset markets: a Federal Reserve stick pin.

That’s the advice of Nobel Prize-winning economist Robert Shiller, who told CNBC on Monday that an early interest-rate hike is needed to stop the booms. “There are places in the United States that are really in bubble territory. For example, San Francisco [real estate] is hot, hot, hot. They’re going way over the asking price. Every house sells quickly,” he said.

The problem with central banks like the Fed is that they tend to “ignore speculative bubbles until it’s too late, and that may be the case now, said Shiller. “Stock markets in the U.S. are quite high, and prices in the real-estate market are getting high.”

In a recent CNN article entitled “House hunting horror stories,” several would-be first-time buyers relayed tales of woes. Those include a Denver couple who has all but given up after touring 30 houses and finding a nightmare of deceptive list prices and bidding wars. In Dallas, one hopeful spoke of California money pouring into Texas and driving up prices.

Shiller said rising stock and house prices are part of the “new normal” boom, which he described as a “funny boom in asset prices because it’s driven not by the usual exuberance, but by an anxiety” about jobs and the aftermath of the 2008 financial crisis.

Need to Know: What June gloom? Investors rack up record debt to buy this market

Many analysts don’t expect the bull market in stocks, now in its seventh year to derail soon, but they also think gains will come far less easy. Indeed, the S&P 500SPX, +0.21% is up just 2.4% so far this year. And there’s plenty of talk of too-expensive stocks.

The price-to-earnings ratio is at 17.5 on a 12-month trailing basis, according to FactSet, well above 10-year average of 15.8. The cyclically adjusted price-to-earnings ratio, or CAPE, has topped that 2007 peak, which means expected 10-year returns are in the low single digits, based on Shiller’s studies.

In an interview with Goldman Sachs strategist Allison Nathan that published over the weekend on Zero Hedge, Shiller said the bond market looks most likely to be in a bubble.

But with so many assets looking expensive, he said the best thing for investors to do is “save more because their portfolio probably won’t do as well as they imagined.”

Read: Signs this bull market is running out of steam

A market ‘time bomb’: Shiller wasn"t the only doomster talking bubbles. Nouriel Roubini, chairman of Roubini Global Economics, warned Monday that financial markets and central banks are playing with a time bomb that’s made up of macroeconomic liquidity and market illiquidity.

He cited the surge in German bund yields from five basis points to nearly 80 basis points in the space of a few days last month

“These events have fueled fears that, even very deep and liquid markets — such as U.S. stocks and government bonds in the U.S. and Germany — may not be liquid enough,” said Roubini. Central banks are creating liquidity to suppress short-run volatility, but are also feeding price bubbles in equity, bond and other asset markets.

“As more investors pile into overvalued, increasingly illiquid assets – such as bonds – the risk of a long-term crash increases,” said Roubini.

Here’s a reminder to question strategies that have ‘beaten the S&P 500’

By BARBARA KOLLMEYER

 

APAC Financial Markets • #Bubbles, #CentralBanks, #RateHike #MarketNews