Is Shiller Right About Trills, GDP?

The Search for New Currencies

Although G.D.P. numbers still aren’t perfect — they are subject to periodic revisions, for example — the basic problem has been largely solved.

--Robert Shiller, "A Way to Share in a Nation's Growth"; The New York Times (12/26/2009)

In a piece in today's New York Times, Robert Shiller -- that Robert Shiller, of "the Case-Shiller index," "Irrational Exuberance," etc. -- calls for a new security, "the trill," that's pegged to U.S. Gross Domestic Product ("GDP").

He argues that a such a derivative instrument would satisfy demand for stable, new currencies -- and be a good deal for investors, to boot.

(Mis)measuring GDP

What jumps out at me is Shiller's comment about GDP measurement being a problem that has "largely been solved."

Oh, really?

The same way that Ptolemy "solved" the problem of the earth seeming to rotate around the sun, perhaps? (He came up with increasingly tortured models that placed the earth at the center of the solar system).

Just consider how GDP now accounts for a horrific environmental tragedy like the Exxon Valdez spill in Alaska's Prince William Sound.

The untold billions in environmental damage aren't counted, because "natural capital" is assigned no value in today's economic world.

Meanwhile, the $1 billion that Exxon spent on remediation efforts shows up as a spike in the "value" of services that go into calculating GDP.

Bottom line?

Society's putative wealth actually increased as a result of the spill.

Right.

"Tattoo GDP"

Or consider how GDP currently accounts for tattoo's -- both creating and removing them.

At one end of a shopping center I know, a tattoo parlor puts them on for $100 apiece.

At the other end, a tattoo "removal specialist" gets rid of them for $100.

"Tattoo GDP" thus comes to $200.

But how is society $200 richer as a result?

Accountants have a saying that people "count what matters, and what matters is counted."

Indeed, Mr. Shiller.

Housing: How Much Further to Fall?

Why People Hate Wall Street --
And Wall Street Analysts, too

When stocks are going up, the airwaves are full of Wall Street analysts and other pundits chock-full of stock picks sure to make you money.

So what can you expect to hear after stocks plummet 50% or more?

All the reasons why stocks "are still historically expensive and have further -- much, much further -- to fall," notwithstanding their sickening plunge to date (call this phenomenon "prediction by extrapolation").

Thanks a lot.

Analysts' housing predictions have been much the same.

To be fair, Barron's Alan Abelson, who cites the charts above, has been bearish on housing all along. In his most recent column, "Double Trouble," Abelson makes the scary point that, despite the housing market's chilling fall to date, it still is well above historical trend lines.

Playing Devil's Advocate

Setting aside the counter-arguments for another post (See, "Waiting for Cheap Housing . . . Since 1997"), what if Abelson's right?

Should every prospective Buyer simply wait it out in a rental, until prices are more appealing? Should every growing family squeezed into a too-small house or apartment make do for another 5,6,7 years -- or longer, according to some bears -- until housing prices return to their long-term trend line?

There are more variations on this theme, but you get the idea.

Unless you: a) believe the prognosticators (always a dubious proposition); and b) are very patient, you're better off making housing decisions based on your current life situation, finances, and job opportunities.

My investing background and Realtor experience tell me that no one -- not Robert Shiller, not Nouriel Roubini, not Warren Buffett -- has a crystal ball accurately telling them what housing prices will be next year -- let alone 5 or 10 years from now.

To quote another investing guru, Peter Lynch, "If you spend 13 minutes per year trying to predict the economy, you have wasted 10 minutes."

Substitute "the housing market" for "the economy," and you'll have it about right . . .

Reviving "Animal Spirits"

Less Trust = Simpler Financial System

"The more complex the transaction, the more trust is needed to sustain the transaction."

--Robert Shiller, "Animal Spirits Depend on Trust"; The Wall Street Journal (1/27/2009)

Robert Shiller, the Yale economist who made his name calling the 2000 Stock Market Bubble, has an excellent piece in Tuesday's Wall Street Journal explaining where the financial system is right now, and exactly how it got there.

In an era when trust has been shattered, securitization and derivatives are out, "plain vanilla" debt and credit -- and a lot less of them -- are in.