Critical Observer

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<figure class="cover get-lbdata-from-dom go-to-slideshow-lightbox" data-orig-index="1" id="yui_3_18_1_1_1442263680501_930" style="cursor: pointer; margin: 0px; padding: 0px; position: relative;"><span style="font-family: inherit;"><img alt="Robert Shiller" class="editorial" data-mce-source="Mark Lennihan/AP" data-preembed="image" height="325" src="http://l3.yimg.com/bt/api/res/1.2/1vO0ytbWdFJ2DcdQIIs2dg--/YXBwaWQ9eW5ld3NfbGVnbztxPTg1O3c9NjUw/http://globalfinance.zenfs.com/en_us/Finance/US_AFTP_SILICONALLEY_H_LIVE/This_is_the_chart_that-cd7b169596c9d77cf6dab011c20454cf" style="background-repeat: no-repeat; border: 0px; display: inline; height: auto; margin: 0px; max-width: 100%; min-height: 1px; opacity: 1 !important; vertical-align: bottom; visibility: visible !important; width: auto !important;" width="650" /></span></figure></div>
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<span style="font-family: inherit;"><span class="source" style="line-height: 24px;">(Mark Lennihan/AP) </span><span class="caption" style="line-height: 24px;">Robert Shiller.</span></span></div>
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<span style="font-family: inherit;">Robert Shiller is worried about the stock market. And the Nobel laureate's concern can be summed up in this chart, which shows a steady decline in the valuation of the stock market from both institutional and individual buyers.</span></div>
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<span style="font-family: inherit;"><img alt="Screen Shot 2015 09 13 at 8.25.35 PM" class="editorial" data-mce-source="Yale" data-preembed="image" height="434" src="http://l1.yimg.com/bt/api/res/1.2/fkkQSVN.jkOLHYW5_.DjKw--/YXBwaWQ9eW5ld3NfbGVnbztxPTg1O3c9NjUw/http://globalfinance.zenfs.com/en_us/Finance/US_AFTP_SILICONALLEY_H_LIVE/This_is_the_chart_that-f9c7f21d8ee2fa6cb4953c89e753afe1" style="background-repeat: no-repeat; border: 0px; display: inline; height: auto; margin: 0px; max-width: 100%; min-height: 1px; opacity: 1 !important; vertical-align: bottom; visibility: visible !important; width: auto !important;" width="650" /></span></figure></div>
<span style="font-family: inherit;"><span class="source" style="background-color: white; line-height: 24px;">(Yale)  </span><span style="background-color: white; line-height: 24px;">This chart shows Shiller's stock market confidence index, which he compiles by asking investors whether they think the stock market is overvalued, fairly valued, or undervalued.</span></span><br />
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<span style="font-family: inherit;">In an interview with the Financial Times, Shiller explains that what worries him about this chart is that the drop in investor confidence corresponds with an increase in the valuation and overall index level of the market.</span></div>
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<span style="font-family: inherit;">Said another way, investors keep buying stocks even though they don't really think stocks are, on balance, a good deal. It is, then, something closer to fear than optimism that is fueling the rally in stocks.</span></div>
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<span style="font-family: inherit;">This is a similar pattern to what happened for years ahead of the popping of the tech bubble, which Shiller nailed when his book "Irrational Exuberance" was first published right at the bubble's peak in 2000.</span></div>
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<span style="font-family: inherit;"><span style="background-color: white; line-height: 24px;">Now, the idea that Shiller thinks 1) the stock market is currently in a bubble and 2) that this bubble is being inflated in part by — or in spite of — our fears is not a new theme for him. About a year ago,</span><a data-rapid_p="12" href="http://www.businessinsider.com/robert-shiller-on-the-stock-market-2014-9" style="background-color: white; color: #324fe1; line-height: 24px; text-decoration: none;" target="_blank">Shiller said</a><span style="background-color: white; line-height: 24px;"> our anxieties were driving the stock market to new record highs.</span></span><br />
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<span style="font-family: inherit;">And in <a data-rapid_p="13" href="http://www.businessinsider.com/afp-fear-behind-current-stock-market-highs-nobel-laureate-2015-3" style="color: #324fe1; text-decoration: none;" target="_blank">multiple</a> <a data-rapid_p="14" href="http://www.businessinsider.com/robert-shiller-stock-market-bubble-2015-5" style="color: #324fe1; text-decoration: none;" target="_blank">interviews</a> this year Shiller has said there is a "<a data-rapid_p="15" href="http://www.businessinsider.com/robert-shiller-stock-market-bubble-2015-5" style="color: #324fe1; text-decoration: none;" target="_blank">bubble element"</a> to what we're seeing in the stock market while reiterating his call that this stock market rally is a "<a data-rapid_p="16" href="http://www.businessinsider.com/afp-fear-behind-current-stock-market-highs-nobel-laureate-2015-3" style="color: #324fe1; text-decoration: none;" target="_blank">new normal boom</a>" that is more or less devoid of optimism about the future.</span></div>
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<span style="font-family: inherit;">Beyond the confidence index, Shiller is perhaps best known for his CAPE, or cyclically adjusted price-to-earnings ratio, which measures inflation-adjusted earnings over a 10-year rolling period.</span></div>
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<span style="font-family: inherit;">The idea behind this measure is to give investors a longer-term view on whether stock prices are cheap, fairly valued, or expensive relative to history. Shiller added in his comments to the FT that he found this measure "substantially predicts" stock returns over the next decade.</span></div>
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<span style="font-family: inherit;">And right now, the Shiller CAPE ratio makes stocks look pretty expensive, meaning returns will probably be pretty crappy going forward. So at least we have that to look forward to.</span></div>
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<span class="source" style="background-color: white; line-height: 24px;"><span style="font-family: inherit;">(multpl.com) </span></span><br />
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<span class="source" style="background-color: white; line-height: 24px;">By Myles Udland of Business Insider</span>

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(Mark Lennihan/AP) Robert Shiller. Robert Shiller is worried about the stock market. And the Nobel laureate's concern can be sum...

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