Where Shiller sees bubbles

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When you think of Robert Shiller, the professor of economics at Yale University, you probably think of bubbles. That's because Mr. Shiller is the author of Irrational Exuberance, which identified in the first edition the 1990s dot-com stock market bubble just months before it burst. The second edition, released in 2005, identified the housing bubble just one year before it peaked.

So, given this outstanding track record, it is natural to wonder where Mr. Shiller sees bubbles right now. In an article published on Project Syndicate (hat tip: Abnormal Returns), he doesn't disappoint. While he is humble about his bubble-spotting skills - "It is impossible for anyone to predict bubbles accurately" - he still dishes out. However, what's particularly interesting for many readers is where he doesn't see a bubble: Stocks.

Yes, the S&P 500 has had an amazing run since it touched bottom in 2009, making some investors worried about valuations as it approaches three-year highs amid tremendous economic stimulus from the U.S. Federal Reserve.

"But, while the history of stock-market prediction is littered with too much failure to try to decide whether the bounceback will continue much longer, it doesn't look like a bubble, but more like the end of a depression scare," Mr. Shiller said. "The rise in equity prices has not come with a contagious 'new era' story, but rather a 'sigh of relief' story.

Nor does Mr. Shiller mention bond prices as frothy.

However, he does suspect that commodity prices satisfy the general idea of what a bubble is - "social epidemics, fostered by a sort of interpersonal contagion." Commodities have a "new era" story attached to them, and rising worries about food prices and weather-related impact on heating fuel prices are contagious stories, he contends (no word on rising demand from China and India though).

"They are even connected to the day's top story, the revolutions in the Middle East, which, according to some accounts, were triggered by popular discontent over high food prices - and which could themselves trigger further increases in oil prices," he said.

But his favourite candidate - though far less investable for most investors - is U.S. farmland, where prices soared last decade and did not correct to nearly the same extent as the housing market.

"The stories that would support a contagion of enthusiasm for it are in place, just as they were in the 1970s in the U.S., when a similar food-price scare generated the century's only farmland bubble," Mr. Shiller said.