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Shiller sees U.S. rally cutting out


Mr. Shiller said the Standard & Poor's 500-stock index is still valued at about 27 times earnings -- far below the bubble-era peak of 46 but still well above the long-term average of about 15. Those numbers are based not on last year's earnings but on a 10-year average of profits.

"I think we could have a number of disappointing years," the economist said in an interview yesterday with The Globe and Mail. "We see earnings growing rapidly, but I feel skeptical about [the sustainability of] that."

Several of the world's most-followed stock indexes have reached their highest points in years or are closing in on new records. The Dow is within 80 points of its record close of 11,722.98, reached on Jan. 14, 2000. And the S&P 500 is about 200 points below its record high of 1,527.46, achieved that same year. Britain's FT-SE 100 index recently broke through 6,000 for the first time since the spring of 2001.

Some investment research firms, such as Montreal's BCA Research, have argued that higher stock prices are justified because corporations are more profitable than they've been in more than a generation. BCA said last month that global returns on equity have doubled since 2002, and now sit at 15 per cent -- higher than at any time in 25 years.

In Canada, as of late last year, corporate profits equalled more than 14 per cent of gross domestic product, well above the norm and higher than during the oil booms of the 1970s.

But Mr. Shiller said he has examined patterns of corporate profitability over many decades, and there is a strong tendency for them to revert to the average.

The trigger for a profit slowdown, he suggests, could be a fall in consumer confidence and U.S. housing prices, the signs of which are beginning to appear in places such as San Francisco, Boston and Miami. Mr. Shiller updated Irrational Exuberance last year and devoted a large chunk of it to his view of speculative bubbles in real estate.

"It looks like we're at the peak" in U.S. housing, he said. "But I can't claim victory yet.

"The equity bust of 2000 produced a mild recession, and was rather short-lived. It's very hard to predict . . . [but] if the real estate market does tank, it will cause a worldwide recession." Falling real estate values "will probably be spread over many countries."
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