This archive report was first published on 28 June 2020.
Robert Shiller, a Yale University economics professor and Nobel Prize winner, has written an insightful book on the impact of narratives on major economic events. In a recent interview, he discussed the current market situation and offered guidance for investors.
Shiller noted that the COVID-19 pandemic is an unusual event that has originated from a major exogenous crisis, which is not typically a trigger for business cycles. He cautioned investors against taking extreme measures, such as selling out completely or buying into leveraged positions, during this high-volatility period.
When asked about relatively safe asset classes, Shiller pointed out that real estate was already high and may continue to rise due to low mortgage rates. However, he noted that the Case-Shiller price indices have not been increasing as rapidly in recent months, and real estate was already showing signs of peaking. He also warned that the bond market could experience a significant collapse if interest rates shoot back up.
Shiller emphasized that there is no safe option in the current market, but suggested considering cash as part of a diversified portfolio. He also highlighted the importance of understanding the impact of quarantines on businesses and the economy, which he referred to as a 'co-epidemic' of the coronavirus and a narrative epidemic about confidence and outlook.
Regarding policy measures, Shiller noted that international action, such as central banks working together to stimulate the economy, has been effective in past crises. However, he pointed out that interest rates have been low for so long that there is limited room for further action.
Shiller's insights offer valuable lessons for investors and policymakers, including the importance of appreciating the threat of contagion and epidemics, and understanding the unpredictable nature of economic narratives.
