Nobel laureate Robert Shiller warns of US equity bubble

Robert Shiller, one of three American economics Nobel Prize winners of 2013, warned yesterday the recent sharp rise in equity prices in the US was dangerous and that it could signal the building of a financial bubble.

Shiller, who co-created the closely watched S&P Case / Shiller Home Price Index, said he was concerned about the spikes in stock prices, especially in financial and technology sectors, which he said were overvalued.

Overvalued assets led to the creation of bubbles as their prices far exceeded their true worth, which led to the collapse of a sector.

Shiller told Der Spiegel  that he was worried about the boom in the US stock market, because the US recovery was still weak and vulnerable.

The economist, who won the coveted Nobel Prize along with fellow American economists, -- Eugene Fama and Lars Peter Hansen -- for their research on asset prices, said that stock prices had soared in many countries, while the housing sector in countries such as Brazil had ''drastically'' high prices.

He said he was not yet sounding the alarm, but in many countries stock exchanges were at a high level and prices had risen sharply in some property markets. He added, that could end badly.

However,  Shiller and DoubleLine Capital CEO Jeffrey Gundlach did not see any bubble in the housing market even though the index had soared 13.3 per cent this year through September.

Shiller told Barrons that the US went through the biggest housing bubble in US history in the 2000s, and there was a knee-jerk reaction among some people who thought it was playing out once again Shiller told Barron's.

He added but what needed to be considered was that these were very rare phenomena, and it was such a decisive break at the end of the last housing bubble that we might not be psychologically ready for another bubble.

According to Shiller's questionnaire, home buyers expectations for home-price increases had fallen faster than mortgage rates since 2004. He said people's views therefore must be less and less sanguine.