In scary times like these, it is comforting to talk to someone who has seen and studied a lot of things – 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, Narrative Economics: How Stories Go Viral and Drive Major Economic Events. The 73-year-old spoke about how contagions shape much of our lives – whether we realise it or not.
What is your take on what is going on with coronavirus?
This is a very unusual event for the markets – not many events have their origins in a major exogenous crisis like this. That’s not normally a thing that starts business cycles.
What thoughts do you have for investors in moments like this?
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 doesn’t necessarily do that, and that we could be vulnerable to more drops. It’s a high volatility period. I would advise people not to take any extreme measures. Don’t think it’s the time to sell out completely, but also, don’t conclude it’s a big buying opportunity and push into leveraged positions in the market.
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Are any asset classes relatively safe right now?
It’s 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 haven’t 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. There’s no safe option right now.
What are we learning about the global economy right now?
One thing being revealed is what happens during quarantines, if people just stay home. Businesses depend on a steady flow of commerce, and they’re 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. That’s a new one, it’s happening fast, and it’s very contagious. Everyone’s talking about this.
Can policy measures help mitigate what is going on?
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 can’t push them down much further.
What lessons are going to come out of this?
One thing is that we’re going to appreciate the threat of contagion and epidemics. Influenza comes every year, and causes thousands of deaths, but we don’t 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.
It’s 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 – and we’re just not prepared for it.