Robert Shiller: A Chilling Prediction On Fed Rate Cuts

by Dr. Mark Skousen, Advisory Panelist, Investment U
Wednesday, April 23, 2008: Issue #787

Yesterday was a beautiful day at Yale University, where I spoke before a standing-room only crowd of MBA students about my new book, “EconoPower: How a New Generation of Economists is Transforming the World” (Wiley & Sons, 2008).

The discussant for the book was Robert Shiller, the most in-demand professor of economics in the Yale School of Business, and for good reason. Shiller has had an uncanny ability to forecast the direction of both the stock market and real estate.

In early 2000, he predicted the collapse in the Nasdaq stock market, and in 2005, he warned of an impending implosion in the U.S. real estate market.

I devote an entire chapter of “EconoPower” to Robert Shiller’s remarkable ability to see into the future. But it wasn’t that chapter that Shiller talked about…

Robert Shiller’s Focus On Another Great Depression

Robert Shiller focused on the chapter called, “Is Another Great Depression Possible?” In it, I make the bold claim that we are no longer “depression proof,” and that there are three potential scenarios that could threaten the foundation of our monetary system.

The third scenario is “a series of unexpected events that could trigger a major financial accident – a run on the dollar, a real estate crisis, a major terrorist attack, or a natural disaster that could overwhelm the monetary authorities.”

Shiller, who publishes the famous Case-Shiller Home Price Index, stressed that the real estate crisis could be so severe that the Fed would soon have to take additional measures to counter the collapse. He told me that he is writing a book about the subprime lending scandal, and how it will affect the economy. In his view, the housing crisis is far from over. Take a look…

He notes with no particular surprise that the headlines keep rolling in: Housing sales plummet, prices fall, inventories grow and foreclosures skyrocket. According to Shiller, there is still no evidence that the bottom has been reached.

Robert Shiller’s Fed Prediction

Then Robert Shiller shocked the entire audience when he predicted “the Fed will be forced to cut rates to ZERO!”

Shiller is convinced that the real estate market is so big and potentially unstable that it will test the will of Ben Bernanke to the extreme, and that all previous efforts – the aggressive cuts in the Fed Funds rates, the injection of new liquidity (M2 is growing at 16%!) and the bailout of Bear Stearns and other major financial institutions – are just not enough.

Great Depression-like actions will be necessary to keep the economy afloat.

Will the Fed be able to turn the tide? Shiller believes another Great Depression is still “unlikely,” and that the tools to stabilize the monetary system, albeit artificial, are sufficient to keep a collapse from occurring.

But it won’t be easy.

Fasten your seatbelts, friends. The most recent financial crisis won’t be the last. I wouldn’t be selling your gold, silver, or oil stocks any time soon.

In liberty,

Mark

Today’s Investment U Crib Sheet

Here’s a look at Robert Shiller’s index on the History of Home Values. It’s striking:

Looking at the current run up in prices, compared to the historical record, it’s easy to see why economists are concerned with inflated home values.

The current boom in housing prices is larger than the last three combined.

Caution is the guideline for investing in real estate this year. With the markets as volatile as ever, commodities such as gold should still be considered as a hedge against inflation and negative market returns.

Mark wrote about gold and gave us three good reasons to own it. At the time, gold had just hit a record $850 an ounce. Today it’s hovering around $906 – 10% off its record high of $1,029. But, as Mark suggests, the Midas Metal could move higher still, so take a look in Investment U Issue #748, The Price of Gold… Three Reasons Why This Precious Metal Should Be In Every Portfolio.

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