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The Credit Bubble Pt. 2

Behind the corporate credit bubble that’s Thursday night’s Ratigan Report.

Yale University Stanley B. Resor Professor of Economics, Robert Shiller joins the guys for this conversation.

Stock investors best remember Shiller for correctly calling the top of the market in 2000. He is also a co-founder of MacroMarkets LLC, an alternative investment firm.

Can you put the talk of a bubble in context for us?

The stock market is very hard to predict, but I am a little worried about it,” Shiller says. “It’s gotten a little pricey. The speculative enthusiasm has been building and that’s part of the reason for the credit bubble. We’ve had a housing boom that’s losing its steam.”

He adds that we have booming markets in Asia and around the world that are fragile so he feels there’s more downward risk.

Ratigan Report

Why are banks comfortable lending right now?

“This kind of thing happens in a booming market,” Shiller says. “We’ve had a booming stock market and a booming housing market. We’ve seen the same kind of loosening of credit in the housing market. And now with the subprime mortgage debacle-  it’s correcting. It’s similar in the stock market; you might see the same thing.”

What’s the risk?

Stocks should be part of one’s portfolio but at this time there’s a substantial risk of a correction in the stock market, (and) of a recession at the same time… so I don’t think this is the time to be heavily exposed to the market. “ answers Shiller.

What would be the catalyst for a correction?

“The way in which a speculative boom comes to an end is always mysterious,” he says. “I think the Feb 27th crash in the Chinese market and the repercussions that had all over the world is as good an example as any. Right now we’re much more global in our sentiment… (the developing world) is so unstable at this point with high valuations. I could see it happen abroad. It’s very hard to predict. It’s a change in psychology I’m worried about.”

Eric Bolling interjects that Feb 27th wasn’t a crash – it was a correction.

Shiller says “I’m not so gloomy. I’m just (explaining) what the risks are. And when you look at the way major market corrections occur, it is often preceded by a sequence of events like we saw in February. Those kinds of events are unsettling to confidence and if we have a repeated sequence of them it can accumulate into a major downturn.”

What is your immediate view right now?

Stuck at 14,000?

I think the housing market is the most serious problem right now,” says Shiller. The housing market is in decline at this point. And it’s different from the stock market because it’s more predictable than the stock market. It has momentum and it’s going down and I can see this continuing. We are emerging from the biggest boom in US real estate history. What this does to confidence in the stock market is a big unknown.”

Click here to read The Ratigan Report: The Credit Bubble Pt 1.

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Trader disclosure: On May 24, 2007, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders:
Najarian Owns (JPM), (SPF), (MU, (EMC), (BIIB), (FITB); Bolling Owns (T), (DIS), (ICE), (NMX), Gold, Silver, Coffee, Sugar