Your Money: Coronavirus fears shake Yale economist Robert Shiller

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[March 20, 2020]  By Chris Taylor

NEW YORK (Reuters) - In scary times like these, it is comforting to talk to someone who has seen and studied a lot of things Ė booms, busts, and everything in between.

Enter Robert Shiller. The Yale University economics professor and Nobel Prize winner recently came out with an uncannily prescient book for the current moment, ďNarrative Economics: How Stories Go Viral and Drive Major Economic Events.Ē

You might also know him from the Case-Shiller home price indices, or the Shiller P/E ratio for valuing equities.

The 73-year-old spoke with Reuters about how contagions shape much of our lives Ė whether we realize it or not.

Q: What is your take on what is going on with coronavirus?

A: This is a very unusual event for the markets Ė not many events have their origins in a major exogenous crisis like this. Thatís not normally a thing that starts business cycles.



Q: What thoughts do you have for investors in moments like this?

A: The last time we were near a bear market level, the market rebounded again to new heights. So some people are thinking that the same pattern will just repeat itself again. But I would caution them that the market doesnít necessarily do that, and that we could be vulnerable to more drops.

Itís a high volatility period. I would advise people not to take any extreme measures. Donít think itís the time to sell out completely, but also, donít conclude itís a big buying opportunity and push into leveraged positions in the market.

Q: Are any asset classes relatively safe right now?

A: Itís a risky time, and I suspect the volatility might continue for equities. Real estate was already high, and I guess with low mortgage rates it could go a little higher. But the Case-Shiller price indices havenít been going up as fast in recent months, and real estate was already looking peaky.

With the bond market, if interest rates shoot back up, you could have a big collapse in bond prices. Maybe cash is an alternative to consider, as part of a diversified portfolio. Thereís no safe option right now.

Q: What are we learning about the global economy right now?

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Robert J. Shiller, Sterling Professor of Economics at Yale University attends a session at the annual meeting of the World Economic Forum (WEF) in Davos January 24, 2014. REUTERS/Denis Balibouse/File Photo

A: One thing being revealed is what happens during quarantines, if people just stay home. Businesses depend on a steady flow of commerce, and theyíre just not prepared for an interruption like this.

I call this a co-epidemic: One is the coronavirus, and the other is like a narrative epidemic, about our confidence and outlook for the economy. Thatís a new one, itís happening fast, and itís very contagious. Everyoneís talking about this.

Q: Can policy measures help mitigate what is going on?

A: In past crises, confidence has been bolstered by international action, like central banks coming together and doing cohesive things to stimulate the economy. Right now we are sort of out of ammunition, with interest rates having been so low for so long. We canít push them down much further.

Q: What lessons are going to come out of this?

A: One thing is that weíre going to appreciate the threat of contagion and epidemics. Influenza comes every year, and causes thousands of deaths, but we donít think much about it. We have to understand that epidemics are very hard to predict, even for seasoned epidemiologists, and the contagion rate is highly variable. Now we have to worry about coronavirus mutating, and becoming even more deadly than it already is.

Itís the same thing with contagious economic narratives. There are powerful narratives in America, that we should live large, and enhance our image, and be seen as big spenders. That may have helped boost the economy, but that narrative is tarnished now. With the panic, now people are thinking that they might lose their jobs, or face high medical expenses Ė and weíre just not prepared for it.

(Editing by Beth Pinsker; Follow us @ReutersMoney or at http://www.reuters.com/finance/personal-finance.)

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