Robert Shiller, 2013 Nobel laureate in economics, told a German magazine sharp rises in equity and property prices may signal a dangerous financial bubble, which could have an extremely bad end.
The Sterling Professor of Economics at Yale University, who shared the Nobel Prize with two other Americans for research into market prices and asset bubbles, called the Brazilian property market and the US stock market areas where care is needed.
“I am not yet sounding the alarm. But in many countries stock exchanges are at a high level and prices have risen sharply in some property markets,” Shiller told Der Spiegel magazine. “That could end badly,” he said.
Describing the overvaluation of the financial and technology sectors he commented: “I am most worried about the boom in the US stock market. Also because our economy is still weak and vulnerable“.
Shiller is worried about house prices in Rio de Janeiro and Sao Paulo, saying Brazil as another area of concern.
“There, I felt a bit like in the United States of 2004,” he said. The scientist draws a parallel between middle class growth and investment opportunities in Brazil to a similar trend he observed in the US around 2000.
The 2008 financial crisis was triggered with the help of a US housing bubble. “Bubbles look like this,” he commented to the magazine. “And the world is still very vulnerable to a bubble.”
Financial bubbles appear when the investors don’t mind the increasing distance between asset price and market fundamentals, continuing to inject funds.
The US stock market has risen steadily over the past two months. The Dow Jones industrial average crossed 16,000 for the first time and the Standard & Poor’s 500 index rose past 1,800, to a new record high.