March 16, 2000

USA Today
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Yale Professor Predicts Doom, Gloom for Stocks

By David Henry

NEW YORK — Feeling queasy about the stock market? Worried that you’re depending a bit much on compounding stock returns to pay for retirement or college tuition?

It so, you might throw up after reading a new book by Robert Shiller, a Yale economics professor, and published by Princeton University Press. Irrational Exuberance should be in bookstores in early April, and it is likely to cause a stir as reviews come out in the next few weeks,

Shiller illustrates how the current market is like a naturally occurring Ponzi scheme in which investors become promoters for the game after receiving initial payments with money taken from subsequent investors.

His big push is to attack the conventional wisdom that stocks have and will always be the best investment, even at times like this after prices have rocketed. He argues that what comes next may well be a grinding, decade-long decline from which investors won’t recover until about 20 years from now.

In short: Dow 10,000 in 2020. "There’s a lot of uncertainty, but that’s a good prediction," Shiller said this week. Between now and then, he says it’s plausible the market could lose half its value, or roughly the value of all U.S. homes.

If you’re going to need to take money out of the market in 20 years, Shiller would have you try out zero and 1% as assumptions for annual stock returns in your financial planning. He hopes to prod you to start saving more, invest in some inflation-indexed bonds and real estate. He would like universities and foundations to spend less of their endowments. And while the Yale professor doesn’t suggest it, parents might tell their kids about the virtues of community colleges.

Shiller compares the 1990s bull market to those that peaked in 1901, 1929 and 1966. Those years registered the highest spikes in valuations in his records going back to 1881. By his calculations, early this year valuations were one-third again higher than the 1929 record.

Don’t fear a crash as much as endless torture. The 1901 peak was followed by a gradual decline in which dividends were basically the only source of return. After 20 years, investors had an average annual real return of negative 0.2%.

The October 1929 crash was followed by an encouraging rebound that first made the crash look like a buy-on-the-dip opportunity. The horrible damage followed in the ensuing two-year slide. Twenty years later the average annual real return was 0.4%. From the market’s 1966 peak, the average annual real return 20 years later was 1.9%.

The prospects could be even worse this time around. Dividends that helped offset price declines were much higher at earlier peaks than today’s 1.2%.

usatoday.jpg (68261 bytes)Shiller is likely to be criticized for the price-to-earnings ratio he uses as his measure of valuation. His earnings number is an average from past 10 years’ earnings. Some will say that amounts to driving while Looking in the rearview mirror. Wall Street generally prices stocks off of estimates for earnings a year or two in the future. Bulls says that’s essential now so as not to miss the benefits of earnings gains from productivity improvements to be realized from new technology.

Shiller says Wall Street is chronically too optimistic, particularly after a run of climbing earnings. Besides, if you use current earnings or earnings a year out, the recent ratio would still be around the levels of 1929. (You can get his data at

His title is from Fed Chairman Alan Greenspan’s Dec. 5, 1996, speech when the Dow was around 6000. Shiller had argued to Greenspan the market was irrational two days earlier in a hearing of market experts held by the Fed. Shiller says the Dow’s climb to 10,000 doesn’t prove he was wrong. His time frame for disappointing returns was five to 10 years from then. Many stocks have lagged since, even though tech stocks have taken the major indexes higher.

Surprisingly, Shiller aims to reduce the confidence in stocks that started building on a friend’s book, Stocks for the Long Run by Jeremy Siegel of the University of Pennsylvania. Siegel encouraged Shiller to write this book. He says Shiller is good at describing investor psychology that has taken tech stocks ridiculously high. But he adds, "I’m happy with the overall market." Yet, Siegel, too, recommends buying inflation-indexed bonds and real estate, as well as stocks. Will there be periods of 15, maybe 20 years, of no real gains from stocks? "Certainly," Siegel says.

David Henry’s e-mail address is