The Nobel Laureate:
Robert Shiller, the Sterling Professor of Economics at Yale, has an interesting take on economic recovery. Dr. Shiller won the Nobel Prize in economics in 2013 for research into the impact of perceptions on asset prices. Additionally, he is famous for publishing his index of home prices. He publishes the Shiller index monthly and shows housing trends over thirty and ninety day intervals.
A Self Fulfilling Prophecy or an Economic Recovery
In a recent interview, Dr. Shiller argued that the causes of the Great Depression and today’s situation were not correlated. In his view, since the cause of the earlier upheaval was economic, whereas the cause of the current one is health related, implications for a recovery are quite different. Prior to the beginning of the pandemic, the world economy was thriving. Corporate balance sheets where strong and liquid. Therefore, he views fear as the main factor that could cause this economy to fall off a cliff. Dr. Shiller argues that over-publicizing by media and fellow economists of the possibility of descending into a depression creates fear. As the level of fear rises, it poses a risk that warnings will become self fulfilling prophecies. Interestingly, he argues that rising fear will impact the thinking of all investors, not just amateurs on the periphery.
Don’t Be Blinded By Fear
Dr. Shiller advises investors to guard against succumbing to hysteria. He recommends that they do what they are trained to do. In other words, they must analyze financial information carefully and make wise, empirical decisions. Most importantly, they must endeavor to avoid painting all opportunities with the broad stroke of fear.
Perceptions and the Real Estate Market
Dr. Shiller also theorizes that human perceptions impact asset values disproportionately. Over the years we have experienced many trends which support Robert Shiller’s research. For example, there was a time when those who could afford to wanted to live in the style of the rich and famous. Therefore, many built mega homes catering to their most fanciful dreams. They featured amazing chef’s kitchens, spectacular swimming pools fit for resorts and man caves with extraordinary theaters and sound systems. But long before the current crisis came upon us, these homes became more and more difficult to sell. As peoples’ definitions of a dream lifestyle changed, they began looking for homes that better suited their new expectations. This is a classic example of assets being revalued to conform with new perceptions.
As we navigate through a difficult recovery, some may value real estate according to current economic perceptions. As a result, those who think ahead to a more normal time will benefit from newly created investment opportunities.
Dr. Shiller believes that the recovery from the economic effects of the pandemic will be difficult. However, he argues that the recovery from the Great Depression happened over ten years because the downturn was economically triggered. Since dangers facing us today were triggered by other factors and during a strong economy, he believes less time will be needed. Taking into account the massive economic stimulus acts passed by Congress, he predicts a recovery in two years or less.
However, he also expects that restoring unemployment to normal levels will be a much more time consuming process. Historically, unemployment rates rise quickly in times of crisis, but recover much more slowly once economic disruptions have passed. Therefore, he predicts that it will take several more years to see a full recovery with respect to jobs.
What Does the Future Hold?
As Franklin D. Roosevelt said, “the only thing we have to fear is fear itself”. We must heed this warning and come together as a nation. Fear mongers must not rule the day. Therefore, each of us must continue to believe in the resilience of our nation. We must seek inspired leadership to guide us out of this crisis.
I strongly believe in the philosophies of giants like Warren Buffett. They argue that wise investors view a downturn as an opportunity and as a result profit handsomely. There are favorable signs in this real estate market. For example, the Federal Reserve has lowered the prime lending rate to 0%. In response, lenders now offer mortgage rates lower than those available in any year since records were first kept in 1971. Therefore, housing costs are lower and potential returns are enhanced.
Focus On Opportunities
So plan ahead. Analyze your financial position and chart a course through these uncertain times. But above all, think positively and focus on opportunities. You are sure to find them!
See opportunity instead of doom and you shall reap handsome rewards.
Andrew Kruglanski, Broker