Shiller: Talk of 'Secular Stagnation' May Have Tripped Stock Market

"The most prominent story since the September peak seems to be one of a 'global slowdown' with associated 'deflation,'" Nobel laureate economist Robert Shiller of Yale University writes in The New York Times. 

"Underlying this tale are deeper, longer-term fears. There is a name for these concerns. It is 'secular stagnation' — the idea that the world economy may languish for a very long time, even for generations." 

Shiller discovered through research that use of the term secular stagnation exploded beginning last November. 

That happened after former Treasury Secretary Lawrence Summers used the phrase in a Nov. 8 speech, and Nobel laureate economist Paul Krugman lauded the speech in The New York Times Nov. 17.

"Nations’ periods of slow growth can indeed last for decades," Shiller writes. "But why predict something like that right now and generalize this prediction for the whole world? Here we do not find consensus, only ideas whose relevance is hard to judge."

And it will be interesting to see "whether this thought virus mutates into a more psychologically powerful version, one with enough narrative force to create a major bear market," he says.

But management consultant/venture capitalist Peter Cohan writes on Forbes.com that Shiller has it all wrong.

"If he presented this argument in front of the MIT economics department that granted him his Ph.D. in 1972, I think that they would demand better proof than he offered Times readers," Cohan says.

"While the idea of a thought virus is delightful, his article does not provide evidence that the secular stagnation virus caused stocks to fall. . . . My guess is that hedge fund selling may have contributed to the stock tumble."

If Shiller was right, stocks should have fallen at the same rate as media mentions of the phrase rose since November 2013, when it began going viral, Cohan writes. But that hasn't happened: the S&P 500 has risen about 7 percent since then.

"I think a more likely reason is that hedge funds were forced to repay money they had borrowed to bet on rising commodity prices earlier in 2014," Cohan says. With commodity prices plunging, they were forced to sell stocks to make good on the loans.

But Hamilton Nolan of Gawker sees value in Shiller's idea.

"The refreshing thing about Robert Shiller's perspective is that you don't have to be an expert in arcane financial theories in order to understand the movements of the stock market," Nolan writes.

"Don't worry about whether the explanation of the stock market's movements is empirically correct. . . . Just watch how the herd behaves and try to run away from it as fast as possible."

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