Zhu Ning: Hello, Professor Shiller. It is very good to have you for the Phoenix Annual Finance Summit. And as we all know that we have gone through a very eventful year for 2020. And as we are approaching the end of 2020, I think the audience in China is very curious about your expert views on so many important issues related to global economy, US politics, US-China relationship, and most of all ideas, the pandemic. So, you have been widely regarded as the expert on behavioral finance and on microfinance. So let me start there.
What this year I think is quite eventful in the way that the US stock market dropped by more than 30% earlier this year as a result of the pandemic. But then to many people’s surprises, not only did it come back, it came back with vengeance and has set new records. You are the one who have designed this methodology of cyclically adjusted price-earnings ratio. And according to your research, you think the US stock market has probably been in bubble or in irrational exuberance for already some time. What's your take on this year’s performance and if you can make some forecast for the coming year?
Robert J. Shiller: Yeah, the ratio have become widely quoted on, is this CAPE ‘cyclically adjusted price-earnings ratio’. For the United States, dated back to 1881, there are only a couple of periods when it's been as high as it is now. One was 1929, just before the Great Depression, and the other was 2000, when there was a major contraction, that was the dot com bubble. Very high level at the market right now. However, we are also in another circumstance right now which is not shared by those two other moments, 1929 or 2000. That is long term interest rates are very low. So, both markets, stock market and bond market were overpriced by historical comparison. And that finds us need to wonder whether there could be a major contraction in the US stock market. It's not the whole world. CAPE ratios in other countries are also high, including countries like China with high exposure to information technology. It’s both a low interest rate boom, it’s also a technology boom. Communication services which tend to be high tech nowadays. We are doing that right now. We are using advanced communication services. So, it's not clear how to compare this with other episodes. A history is like that. It doesn't repeat, but it rhymes. So I don't know right now, where are we going?
However, I am concerned. And I'm not the only person who is concerned. In the United States, I've been doing surveys and investor opinion. And one of the questions is, what is the probability right now of a 1929 style crash? And in that we're seeing in the last six months, record since I started asking that question. In the late 1980s, record had concern about another crash. So in some people's mind, I cannot predict the stock market with great accuracy in short run, but I would say that it's a bit like, we have a preexisting condition. It’s fear of a crash. It's on everyone’s mind. They are dismissing it now, but it’s on their mind. There is some probability of happening. With Covid19, if you have a preexisting condition, you are more likely to get in trouble，with the disease. I think we have a preexisting condition in economics of fear of another crash. It is similar to what we see the year before the crash, 1928, 1929. That fear was well known than most people thought it was good investment. Same thing is happening right now.
Zhu Ning: I guess the people who tend to disagree with the concern or the fear would say that this time may be different because we are going through non-traditional monetary policy, quantitative easing and talking about MMT, the modern monetary theory. In certain countries, during certain periods, we are witnessing and experiencing negative interest rate. So do you think the change of monetary framework is going to change the way how we assess asset prices and bubble as a result of that?
Robert J. Shiller: Right. Look at the narrative about the monetary framework.
Zhu Ning: You are the author of Narrative Economics. Yes, please.
Robert J. Shiller: There was the financial crisis over 10 years ago. There was a worldwide phenomenon. At that time, central banks around the world did much more aggressive monetary stimulus than people would have thought. And in particularly adopted quantitative easing. So that was an experiment in monetary policy of 10 years ago. Back then that was controversial. There was a lot of talk about a possible new depression of the stories, of backgrounds became suddenly on people's minds, post 1929 stories. Fear of a great depression suddenly exploded. I can document that with various searches. People were concerned about a crash depression in 2007. But now we are even higher, the market is much higher that it was in 2007, especially in the United States, which is the most expensive stock market in the world. But what happened with the drop this year in stock market. The US stock market between February 19th?and March 23rd, fall over. And suddenly made a turn around. So you wonder why did people change their opinion so dramatically in such a short?
It was in crash mode for a month. And suddenly on March 23rd, it turned around. What was happening? You have to say it was something about central bank policy. In the United States, the US federal reserve. And that's the aggressive 2008 stimulus package that involve a lot of new vehicles. That was basically a repeat, maybe more aggressive. I think in a sense, in America, with this aggressive policy, investors thought that this might be the turning point. And then they were reminded that there was a dramatic interest in the stock market starting in the Spring of 2009, just over 10 years ago. And the stock market tripled in less than 10 years to an amazing new high. A lot of people are feeling a sense of regret. I know that the fear of a 1929 style crash was very strong in 2009. So a lot of people got out of the market, only to regret doing that later. The feeling of regret are very motivating. If you made the mistake once, you don’t want to make the same mistake again. So I think people start to come back to the market. There are a lot of people who are in the intermediate state in the March of this year, who thought that ‘this might be the time to buy’. But they just hesitated, and the market start going up. Make the mistake again,?so they think maybe it's not too late. And then they push the market up to new highs. So that’s the narrative, a narrative of fear of missing out. Other people were saying ‘it's time to buy and I didn't do it. Oh, my god! Horrible about that’. Also the term ‘vision recovery’ became very popular at that time. And I think it drove the recovery to new heights. People didn't know what to make the Covid19 epidemic. And they didn't know whether they should be out or in of the market. And so there was a rapid learning about epidemics that took place between February and March. And it continued to push the market up after March of 2020.
Zhu Ning: So as we have discussed for quite some time, a key ingredient of any bubble is the new things, things that people have not seen before. And as you pointed out, I think the V-shaped recovery, it's definitely something that investors have not seen in a very long time, at least in the US stock market. So is that personal experience or the lack of personal experience that is a deeply modifying our people’s behavior. And speaking of missing out, I think there is another important cause, which is China’s real estate, which is having a similar kind of condition. And people who make jokes about there are probably two biggest bubbles in the whole world right now, one is the US stock market, the other being the Chinese housing market. And you're a leading expert in real estate, we have talked about the housing market in China for quite some time. And I think you have always expressed some concerns with the housing prices in China. But then you also sort of explain that because the economy is growing very fast, many things could be potentially justified. So with the economic growth gradually come to slowdown in China and also with China's household level of indebtedness has increased tremendously in the past five years or so. Also with Shanghai and Shenzhen becoming some of the most expensive cities in housing prices in absolute terms, what’s your updated review about Chinese housing market?
Robert J. Shiller: Oh, that's a big question and not necessarily the world's authority on Chinese housing market. It's a funny situation that we see in the world today. We are all asset classes. The major assets, stocks, bonds and housing are all expensive right now. That reflects a sort of euphoria. But it's tinged with fear. A fear that this might be a harbinger of hard times to come. So people are willing to buy at high prices. That’s unusual situation. Real estate seems to be developing a bubble. Much more happened in the past. The prevailing view among economists is that housing prices are driven by construction class. There is so much land, even in China or the US, that is not that expensive. So I can build a house for you if it isn't in Beijing or Shenzhen. I can build the house for you really cheaply and that was a prevailing view that home prices are stable. And the word ‘housing bubble’ didn’t even come into our vocabulary until the 21st century. They didn't even talk about those terms. I can search for that now with digitized text. There was a housing bubble in the United States in the 1890s, 1880s and I found the newspaper article with someone that writing ‘Should we call this a bubble?’ And he said, ‘No, I like the term boom better because boom doesn't have the connotation that it's going to burst’. So they had housing boomsand they didn't have housing bubbles. But now we've got a new narrative that makes people worry that it might crack down and especially it’s a big city boom. It's not in the countryside so much, although maybe it may also be there. But right now the dominance of big cities is question with new technology. And this is another source of uncertainty about the housing market. Right now we are communicating across oceans. We don't need to live in big cities so much anymore. The question is will you work at home? I think, gradually grow now. And we live more electronically. We have our friends, meetings, meetings with their friends electronically. In that case, it sounds like big city home prices will fall if people don’t need to live there anymore. You want to fight crowds and traffic in the big city and air pollution and all the big city problems. You are attracted to big cities because of events there, because of things like restaurants, or museums, or shows. But if you're reconsidering, I don't want to do those things so much because of Covid19. That also harms big cities. I don't know where that narrative is going. There could be drops in the relative price of big city housing. We have to see how it places out, how it works at home, work at distance. Maybe your future is living in some beautiful rural place. And nonetheless not sacrificing one's career in doing that. Is he getting more international? It seems like, I have friends all over the world now. You don't have to be talking to your neighbors. You can ignore your neighbors and have friends elsewhere.
席勒：这是一个很大的话题。我对中国房地产市场的看法也不一定权威，这是我们大家看到世界上一个有趣的情况。现在主要的资产类别，股票、债券、房地产都很贵，这反映了一种繁荣，但它又带有害怕的色彩，这是担心困难时期可能到来的预兆。所以人们愿意以高价买入，这种情况不同寻常。房地产泡沫似乎正在形成，过去有很多例子，经济学家普遍认为，房价是由建筑推动的。有那么多土地，即便是在中国或美国，也没有那么贵。如果不是在北京或者深圳，我可以以很便宜的价格建房。曾经人们普遍认为房价是稳定的，而 "房地产泡沫 "这个名词直到21世纪才出现在我们的词汇中，之前从来没有出现过。我现在就可以查一下，美国在19世纪八九十年代，有过一次房地产泡沫。报纸上的一篇文章这样写道：“我们应该管它叫泡沫吗? 不，我更喜欢用繁荣这个词，因为繁荣没有暗含破灭的意思。”所以他们叫房地产繁荣，而不是房地产泡沫。但是现在我们说房地产泡沫，人们担心房地产泡沫会破灭，尤其现在这种繁重只出现在大城市。虽然在农村可能也会出现，但是不多。现在随着新技术的发展，大城市的主导地位受到挑战，而这也是楼市的另一个不确定因素。现在我们是跨大洋在交流，我们已经不需要生活在大城市。问题是我们是否可以在家办公，我想这是一种趋势，而且我们的生活会变得更加智能。我们在线上见面、开会，和朋友在线上见面。如果是这样的话，大城市的房价就会下降，因为大家不需要住在大城市了。在大城市，你还要面对拥堵的人群和交通，还有空气污染和所有的城市问题。你选择住在大城市，是因为那里的活动，那里的餐厅、博物馆或各种表演等等。但如果因为疫情的原因，你不再享受这些便利，就会对大城市的房价造成影响。我不知道人们对此会作何反应，大城市住房的价格可能会相对有所下降。这要看事情如何发展，人们在家如何工作，如何远距离工作，也许未来你会住在某个美丽的乡村。尽管如此也不会因此而牺牲自己的事业，我们是不是越来越国际化了？现在我的朋友遍布世界各地，你不必和你的邻居说话，你可以忽略你的邻居，在其他地方交朋友。
Zhu Ning: New technology. I think it's not just changing the way how people do business or live their lives. Finance has been heavily influenced by the development of modern technologies. I think in China probably a very booming area in the past few years so called Fintech or Techfin, the hybrid of information technology with traditional financial services were actually the emergence of using modern technology, trying to fill the gaps that's been left by traditional finance. And I think you have talk about this topic at length in your book, New Financial Order. And you have been a strong advocate for trying to use modern technology or financial technology, trying to make financial services available to everyone and trying to help everyone who services. But then I think a big event in China was, you probably have heard that from news is, the IPO of Ant Technology, which is the renamed of Ant Financial was stopped by surprise. Because of concerns with antitrust, or concern with the booming of their loan business without proper regulation. And what's your comment on what's the boundary, or what's the balance between innovation, or Fintech and regulation, and consumer welfare.
Robert J. Shiller: You know there is a narrative that Fintech is adding to inequality. And that tends to favor a very tiny fraction of the population, who become a part of an enterprise that is technologically advanced and rapidly growing. It could be right. This is a concern about free enterprise economy that there is nothing in the theory that says there can't be a technological change that would fundamentally alter the distribution of income and leave people behind. I talked about it in my latest book Narrative Economics about how technological innovations awaken fears. So I tried to trace back how long go ahead have people been worrying about technological innovation. And the furthest back, I can really trace it was Aristotle in the 4th century BC. There is a paragraph on one of his books saying that‘if machines come along and replace jobs’. I think is the example of if weaving is done by a machine instead of by hand, that will run the risk of workers becoming useless in fabrics. So this idea has been around a long, long time. I called one of my perennial narratives. But it's been especially strong in the last couple of hundred years as industrial revolution took place. It was particularly important in the 19th century when machines became available that would replace farm labor and the percent of the population, who is engaged in farming, a tiny amount, I think in the United States is around 2% of the working population does farming because machines have taken it over. And more recently, the story has become renamed with the term ‘Artificial Intelligence’. And this is a newly scary story. Fintech is right there up front as part of this story. Now when you're in the stock market, you're not trading with just people, you are trading with computers. A machine learning about your quirks. If they discover that you make some kind of mistake, the machine will go after you and exploit you. So this is a fear that is on people's minds continuously for decades now with artificial intelligence. And it has the potential to explode again and do another epidemic of fear. This epidemic right now is supportive of the stock market. Because people like to buy tech stocks. And it makes them feel that they may be inadequate to participate directly in the technology revolution.
Zhu Ning: Worth to use certain technology during this pandemic, so providing perfect justification.
Robert J. Shiller: Right. Both US and China have a strong technology sector. This is an important factor in the stock market. But that doesn't explain the housing boom. It’s a little bit difficult. I think that is a generalized fear that make people want to put down roots, have a nice home, worried they will get out of rich for them.
Zhu Ning: Talking about the poor and the rich, I think one thing is probably close to certain, that is the inequality in wealth distribution has become even worse over the pandemic. I think that's probably the case in China and the US.
Robert J. Shiller: Right. The pain of suffering in the epidemic is related to your economic status. If you can't afford to pay for deliveries, or if you can't afford to pay extra health bills. You are in trouble. You might be living in crowded conditions where there is too many people around so you can't isolate.
Zhu Ning: I know in your book New Financial Order, you have come up with financial innovation trying to reduce the income or wealth inequality. But then I think the west society have been trying to do this for the past few decades, but as we have witness, I think the income and wealth inequality have become worse. And that's creating all sorts of social and political problems. And especially coupled with the pandemics. What would you recommend if you have something that governments or the policy makers trying to consider, trying to solve, or at least alleviate this problem of income inequality?
Robert J. Shiller: I wish I were more of a politician. I have written books and relieving these things. There's a lot of different aspects to it. For example, a lot of people worry about housing. And they are following the housing market with apprehension. So there could be contracts that protect them against lose. We actually work with the Chicago Mercantile Exchange to create a futures market for single family homes. This aggregated by regions. This might become a new form of gambling playing in the futures market. But it hasn't. It's not a big success. People are not used to hedging their risks in the housing market. Another thing is that the risk of livelihoods are not really managed by modern financial or insurance technology. So I was thinking, in the futuristic term, I’m not limited by what is already been done. I was thinking of institutions that would provide home equity insurance against collapses in the housing market. Or new kinds of mortgages that would protect people against changes in housing prices. This is part of the indebtedness we've already mentioned. People borrow a lot of money to buy a house, and the loan is not contingent on home prices. So if home prices drop, there's an economic contraction. You might find it difficult in default. That's what happened in the 2009 crisis. There were mortgage default. So you think it would be more creative thinking. But I think about how to change the mortgage. But that's not something that happens fast, unfortunately in history. There has been the so called shared appreciation mortgages that we tried out over the last 20 years that would take some of the risk of home prices, but they haven’t flourished. I think that there could be more general insurance and livelihood insurance that protect you against. It should be the same spirit that we do for entrepreneurship. Inventions could apply to individual entrepreneurship. You could insure a few. They start to see this. You have companies who teach you computer skills. And you don’t pay them until later. And if you don't get a job as a computer expert, your tuition is waived. This is an interesting development.
Zhu Ning: The imbedded option.
Robert J. Shiller: Yeah, I think that these things tend to grow. I think that career insurance is really an important thing that would make people be more willing to take risks with their careers. Right now a lot of people all go for the same MBA, Masters of Business Administration, which is a good thing, by the way.
Zhu Ning: By the way, I have been a Professor before.
Robert J. Shiller: There is a sense that finance jobs are not as lucrative as it used to be. Commissions are coming down. So it's hard to make money in the traditional way in finance. So I think we could improve our institutions and gradually we are, things are happening. We will make our risk management better. And risk management is critical, saying Covid19 is substantially evolved with our economic fortunes. And the spread of that disease is higher in poor sections. So we have to. It is a big problem, but we don't talk much to epidemiologist as economist. If you ask me to make a forecast now, I feel kind of helpless cause I’m not an epidemiologist. That's a specialty that economists don’t share.
Zhu Ning: Right, and this is something I want to ask but probably you have thought about it. You forecast about how quickly the virous will kick in and keep the pandemic situation under control given the vaccines.
Robert J. Shiller: Well, that has been an important boost to the world stock market. Because people think long term. They've been trained to do that. And they think they going to get a vaccine, and this whole thing will disappear. So why shouldn’t I buy a home for a few years in the stock market? It seems inevitable. With our learning experience, the drop in February and March of this year in stock prices. Especially in the West, which haven’t had a SARS epidemic, they are not used to wearing face masks. They are embarrassed to go out public with this funny mask on. So they don't do it. But they had to learn that there are pandemic, and they do end. In past pandemic, stock markets haven’t reacted that much. In 1918, there was a worldwide influenza epidemic. It did create a recession, but only a mild recession. And you don't see it very much in stock. When I look at the US stock market in 1918, it ended up lower but not a crash. But by 1920, it was very low.
Zhu Ning: Afterwards, big run up before the greatest depression, they triggered people’s reaction after the influenza in 1918.
Robert J. Shiller: The stock market boom began after the influenza epidemic in past. And so is the new world with optimistic sense. You can tell story about the roaring twenties and high appreciation of stock market over that period.
Zhu Ning: But one thing was very clear this year, both in China and the US, the number of retail investors have increased by wide margin during the course of the pandemics. Do you think that's because of the fear of missing out? Or it's because of the subsidies given out from the government, or because people were so bored quarantine at home.
Robert J. Shiller: This is all part of my theory. I’ve noticed personally. I have a financial markets free course online. And my number of students soared during the quarantine period. I’m getting emails from some of my students, there is nothing to do. And the financial markets are wild. This is time to learn about finance. I still think it's a good career to go into, if you like that kind of thing. Some of the best careers are oversubscribed, like neuroscientists. That’s an exciting field. When I visited a neuroscience conference, someone said to me, “this is a really exciting field, but the problem is too many young people who are going to it’“.There aren’t enough jobs for researches in neuroscience.
Zhu Ning：Also talking about investment for education or just investment itself. It seems that people are either more interest in or are forced to take out more leverage or more debt. The level of leverage has increased tremendously considerably this year for most countries. And China was no exception. I think the national level of a better GDP ratio increased by about 40 percentage points, which make China one of the most heavily indebted country in the world, probably next to Japan. There are very diverging views on this topic. Some feel that this is potential systemic risk to China's economy going forward, whereas others feel that many of debt were used for infrastructure, for technology innovation. And so that should be sustainable growth. Could you share some of your insights about this topic?
Robert J. Shiller: Yeah, the rise of debt was also a very important concern in 1929. People were buying stocks on margin before the 1929 crash. You could get a loan then to buy a 90% of the value of your stock market investment. And there was a lot of talk about. I've done searches about that. In 1929, when the market dropped in one day, people thought the end is near. That indebtedness narrative became very strong. So it’s with us again today. But I think, again, it is kind of preexisting condition. We are a little bit fear for this situation. But nobody can prove that it's going to result in a crash. And even if it does, people will think it will come backup. But I think it's a preexisting condition in the sense that if something else hits the market. Then people will think that it's maybe the indebtedness did it and markets will come down. So that is a concern.
Zhu Ning: Probably my last question for you today is about the important topic of US China relationship. With the two largest economies, the two largest countries in the world and with a new election results, and a new president coming into office in a few months, many were hopeful that the relationship between US and China will probably improve in the next few years. And a specific area that's concerning Chinese or Chinese companies is the recent investigation on the possibility of banning Chinese companies listing their shares in the US if certain requirements were not met? I think I probably know your political views all along going forward. What do you think the narrative would become in the US China relationship and also the trade tension, and also the economic, the collaboration in economy and in technology, and in certain other areas such as national security.
Robert J. Shiller: It's unfortunate that there is antagonist under the Trump administration, and the antagonist relation with China that develop. I have long thought China’s development is benefiting the world, and not being a problem. But Donald Trump took one of his advisers Peter Navarro, who wrote a book called Death by China. I thought it was really over the top. I looked at the book. It was blaming China for all of our mortalities. So I guess when people are worried inequality is widening. They want to see someone to blame for. And it was both Mexico and China that got a lot of blame. Mexico for sending a lot of workers over, competing for your job, and China for sending a lot of goods over. It is remarkable how many things we have that are from China, is all the time. Our prosperity has been developed by China. But the narrative reacted against that. I think Biden would be much better than Trump. I don't know. I can't predict what he will do. But there is a fundamental difference. Biden is a kindhearted man who is effusive in his human settlement. And whereas Trump seem to be angry. He punches, shouts, and he is angry all the time. I don’t think that’s good for international relations. I am hoping for a better, where we could partner together more. And someone could live in China and work in US. Or the other way around. All those things could happen. I’m not optimistic for the stock market of the world. (phone interfere)
Zhu Ning: And do you have anything else you want to say to the Chinese audience for the upcoming 2021? I know you are optimistic about US China relationship, less so about US stock market?
Robert J. Shiller: Yeah, the US stock market is not horrible compared to the bond market. We have ‘excess KPO’, which is the inverse CAPE ratio minus the interest rate. And the excess KPO is around 4% in the US. 4% a year for long term. The stock market should still outperform fixed income investments. It's just not as dramatic as it has been. In history, the stock market is often a get rich quick investment, like it tripled in values over the last ten years. It then turns a little bit. You never know exactly when. I don't object to investing in the US stock market, but I think we should be more diversified,?across stock prices, real estate. Even real estate investments are okay. The best thing you can do is diversify.
Zhu Ning: Thank you so much for your time and for your insightful comments. I wish you a good day and a great new year.
Robert J. Shiller: My pleasure, thank you.