In the last year or so, the investment market has reminded me of the late-1990s. Driven by the AI and hyperscaler investment wave, the stock market is no longer bound by gravity, it seems.
Cyclically adjusted price-to-earnings ratio, or CAPE, one of the most prominent valuation gauges, has surged above 40 in recent months while the post-2000 average was merely 28.1.
Speaking of CAPE, when was the last time you saw Robert Shiller, a star financial economics professor at Yale University and a 2013 Nobel Prize winner, on TV explaining why we should be cautious about such a high CAPE level?
If you are a millennial like me, you would associate Shiller with the term “irrational exuberance.” The term became famous during the dot-com bubble, after then-Federal Reserve Chair Alan Greenspan used it in a 1996 speech to describe the “escalated asset values” during the period. Shiller then published a book of the same name in March 2000, around the time of the stock market peak, and since then Shiller, CAPE and irrational exuberance have become a sort of “trinity” that media loved to invoke whenever there was a perceived investment “bubble.”
In the current AI “bubble,” as CAPE has remained above 30 since late-2023—a 35-consecutive-month run, which is the longest since the dot-com bubble—you don’t see Shiller on the TV screen or in newspaper columns as often as before.
Here is a graph of news mentions of Shiller plotted against CAPE:
First focus on the deep blue line, which shows mentions from major and national media in the US. Usually the major media mention him in the news when Shiller appears in an interview, makes insightful remarks or writes columns related to current affairs in the economy and the financial market. The deep blue line has been in a long-term decline.
The late 2017 move is what a normal CAPE and Shiller cycle would look like: when CAPE spiked (above my cutoff of 30), Shiller (and his name) would appear on media outlets much more often than usual.
Another way to look at it is through the Shiller mentions in the Finance Faculty in the News roundup from the International Center for Finance at the Yale School of Management. The last “busy” period for Shiller was around late-2023 and early-2024, when he commented not only on the elevated stock valuations but also on the AI revolution (with Italian media) and confiscation of Russia’s frozen assets in the European Union.
He has turned “quiet” in the last two years. His last major appearance in popular media was probably a New York Times column This Doommaxxing Has Got to Stop in June. Last month, he also posted a new working paper “Non-Marginal” Investor Beliefs, coauthored with William Goetzmann and Dasol Kim through the National Bureau of Economic Research.
Granted, Shiller is now 80 years old and a Nobel laureate, so he deserves to stay away from the news media for as long as he prefers.
So… What’s your point here?
What I have been thinking about is whether I can examine this relative quietness of Shiller in terms of his Narrative Economics framework. In Narrative Economics, Shiller introduced a concept that viral economic narratives can affect economic behaviors.
The headline example of this 2019 publication is bitcoin. The cryptocurrency’s viral success and popularity since the late 2010s can be understood through the lens of epidemiological models—that is, to try to understand how bitcoin’s economic narrative spread among the general public, the same way a virus turns into a pandemic. For example, Shiller mentioned that bitcoin’s associations with anarchism, the Satoshi Nakamoto mystery and the sense of “being part of the future” have helped it become a contagious narrative.
In the book, Shiller focused on how a contagious story can result in substantial changes in people’s economic decisions. I would like to use the “irrational exuberance” and CAPE narrative as an example to explore what happens to a contagious narrative once it has passed its peak.
In Narrative Economics, Shiller described John Maynard Keynes as the “donkeys”[1] that helped the IS-LM macroeconomic model achieve contagion. He suggested that Keynes’s brilliant writing ability and his colorful personal life had helped popularize the IS-LM, which is often described as a formalization of Keynes’s The General Theory of Employment, Interest and Money.
To me, Shiller himself is the “donkeys,” the “celebrity” and the hero of the CAPE economic narrative. His career-long effort to doubt a perfect form of the efficient market hypothesis makes him the go-to expert for any “bubble” discussion and has kept CAPE, a long-term valuation method he developed with John Campbell, among the most discussed measures of equity market frothiness.
Can CAPE survive as a prominent, if not viral, status without its hero?
Honestly, I don’t have an answer. But here are some observations that I can offer.
Take a second look at the graph of news mentions of Shiller vs CAPE above and look for the light pink line. That shows the mentions of Shiller in finance blogs and aggregation platforms like Seeking Alpha. Quite a lot of finance geeks who are not writing for the major media are still invoking Shiller, presumably alongside their CAPE analysis.
Then, take a look at this Google Trends graph of “Robert J. Shiller” and “CAPE ratio” and you can see the interest in Shiller spiked this year and interest in “CAPE ratio” also reached an exceptionally high level.
So, even though Shiller doesn’t appear in front of the TV to answer the hosts’ relentless questions like “Is the stock market currently a ‘bubble’?” or “Do you think there is irrational exuberance among investors?” there is still heightened interest in the CAPE ratio as a valuation tool.
Can the CAPE ratio stand on its own as a contagious economic concept without the stardom of Shiller and eye-catching terms like “bubble” or “irrational exuberance”? This is still an open question that will only be answered after this bull market eventually deflates.
- Shiller got the “donkey” analogy from New Yorker staff writer Lawrence Wright, who said “a donkey is a very useful beast of burden and it can carry a lot of information on its back, and also it will take the reader into a world that he may not understand or may not have thought he cared about until you have this donkey.”
