ROBERT SHILLER DEBUNKS THE STOCK MARKET “WEALTH EFFECT”

The evidence continues to mount against QE.  Mr. Bernanke didn’t see this crisis coming, he responded too late and now he continues to respond with the wrong medicine.  Nonetheless, markets trust his every last move. This debunking comes from noted economist Robert Shiller who says the “wealth effect” from the equity market is “weak” and “not supported in our results”:

“We have examined the wealth effect with a cross-sectional time-series data sets that are more comprehensive than any applied to the wealth effect before and with a number of different econometric specifications.  The statistical results are variable depending on econometric specification, and so any conclusion must be tentative.  Nevertheless, the evidence of a stock market wealth effect is weak; the common presumption that there is strong evidence for the wealth effect is not supported in our results. However, we do find strong evidence that variations in housing market wealth have important effects upon consumption.  This evidence arises consistently using panels of U.S. states and individual countries and is robust to differences in model specification. The housing market appears to be more important than the stock market in influencing consumption in developed countries.”


Source: Plan B economics (thanks to reader Oroboros)

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Old Timer

    Most excellent and rigorous analysis analysis. Thank you!

    Data used goes through the end of 1999 I believe.

    This analysis therefore ends at approximately the transition from the period of Speculative Finance to Ponzi Finance in the US.

    I would think the data from the past decade would further reinforce the author’s conclusions.

  • SS

    So the market has rallied 20% on nothing? There is no inflation from this, no wealth effect, no jobs, etc. Is the Fed just talking up the market? What is all the fuss about? Or is this just a crazy huge irrational market?

  • SS

    It wouldn’t just reinforce it. It would probably obliterate this insane notion that paper gains = real wealth.

  • LVG

    That’s the key here. What is the real impact of the interest rate change? We’ve had falling interest rates for two years now and the economy still stinks.

  • Blobby

    Cheap money hunting yield = increased asset prices

    When to sell… !?