This past week saw the once a year meeting of the planet’s financiers, billionaires, bankers, and government policymakers at the annual gathering of the World Economic Forum in Davos, Switzerland. The meeting has become a yearly opportunity for the global elite to get together in one of the more desirable winter destinations of the world in order to discuss and promote international trade, markets, and finance.
The theme of this year’s World Economic Forum centered on “Creating a shared future in a fractured world.” Around 3,000 participants were there to talk about some of the most serious issues facing the globe in order to reach solutions through greater cooperation.
Global leaders gave speeches and held bilateral meetings with other world leaders and businesses as well. You can be sure that few of them were worried about the state of global stock markets though. That’s because many of these have set multi-year or all-time highs repeatedly in recent months. Consider this five year chart of the S&P 500:
While all of the policy and business connection meetings were busily getting underway, another attendee arrived at Davos with a different mind set. Economics Nobel Prize winner and Yale Professor Robert Shiller came to the meeting with the unpopular agenda of warning against stock market irrational exuberance.
Professor Robert Shiller shared in interviews which he gave on Tuesday that stock market corrections can happen with no warning and at any time. Shiller is not some closeted academic crank. Among his numerous accomplishments, he received the 2013 Nobel Prize for Economics because of his work relating to inefficient markets and asset prices. The man is a legend in fields ranging from home prices to stock market valuations.
Listen to his words of warnings regarding the state of the stock markets today:
“The strong bull market in the U.S. is often attributed to the situation in the U.S. but it’s not unique to the U.S. anyway, so it’s hard to know what the world story is that’s driving markets up at this time. I think it’s more subtle than we recognize. People ask ‘well what will trigger it (a market correction)?’ But it doesn’t need a trigger, it’s the dynamics of bubbles inherently makes them come to an end eventually.”
When the stock market bubble bursts, Shiller says the reasons will be hard to pinpoint:
“Something will be invented to explain it once it happens. If you go back to the most famous correction in 1929 there was no (one event). People look back and try to find something but it sounds contrived.”
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Professor Shiller went on to declare that financial markets can “absolutely suddenly turn.” With one market high after another made in 2017 and early this year, it is easy to forget that this runaway bull stock market like others before it will end badly. The good news is that there is no reason for you to lose sleep at night hoping the next financial markets’ bubble bursting will not be so bad as the last one was.
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