Alan Greenspan in greener days

December 5, 1996, then-Fed-Chair Alan Greenspan warned us about the “irrational exuberance” he felt was creeping into the market (the “Tech Bubble”).

“Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”

The S&P opened December 1988 at 276.50. The index had tripled since the beginning of 1988 and was up almost 6 times since the beginning of 1982 (a prime example of a secular bull market at work). Greenspan was right about irrational exuberance working its way into the market. It was. He was just a few years early. The S&P had another double left in it, peaking at 1550 in March of 2000. Fortunately for him, as was usually the case, his comment was very circumspect/obtuse. As we have pointed out in the past, something Greenspan was well aware of, market prognostication (for that matter any economic prognostication) is very difficult.

“It’s deja vu all over again.” —Lawrence Peter Berra

Yogi Berra

Cautionary words, such as those offered by Mr. Greenspan, are coming at us all the the time. Thank you Yogi for this apt description of the phenomenon. In the case of the stock market the phenomenon decribed is people trying to call a top. Though Greenspan’s “irrational exuberance” is more nuanced than the average pundit, it telegraphed the same message to people knowledgeable about the market … red light, time to be cautious. Last week in the Fed minutes we received a similar message (Deja vu):

“In light of elevated asset valuations and low financial market volatility, several participants expressed concerns about a potential buildup of financial imbalances,” the minutes said. “They worried that a sharp reversal in asset prices could have damaging effects on the economy.”(excerpted CNBC, 11/22/17)

More Deja Vus

Here’s a deja vu from a kortsessions.com post dated April 8, 2013, 4 1/2 years ago, “Latecomers Flocking to The Party” … Really, New York Times! The S&P opened the month of April 2013 at 1570. The Times’ article asserted that “latecomers,” individual investors, were flocking to stocks at just the wrong time. Now, here is a post from CNBC’s website dated 11/24/17 (S&P500–2602!) asserting the same situation: “Individual investors jumping in as bull stretches to new highs in late cycle rally”, also suggesting the end is nigh. 

Are we there yet?

Might I suggest that we are still early in the last three innings of this secular bull market. Yes, there will be sharp and scary corrections ahead, maybe even a cyclical bear market. But before this secular bull ends everyone will be in love with their stocks. Every night the Nightly Business Report will have remote interviews with investors coming out of their neighborhood Charles Schwab office, brimming with confidence about the market and their holdings. And, they will be saying things like, I’m not worried about a down market … I‘m in stocks for the long-term … where else can you get 8 (9 or 10) percent on your money? This is exactly what they were saying at the top in 2000 and they will say it again. As I have said before, I do not believe we are there yet (at that secular peak). But, if you are looking for empirical evidence of a real secular top, these types of pronouncements would be a good place to start.

More signs of a speculative top

“Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day’s financial news as he worked with rag and polish. An old beggar who regularly patrolled the street in front of my office now gave me tips and, I suppose, spent the money I and others gave him in the market. My cook had a brokerage account and followed the ticker closely. Her paper profits were quickly blown away in the gale of 1929.” Financier/ Investor — Bernard Baruch 

There is no question that as we begin to top out we will get irrational exuberance; and, just like Yogi said, it will be “deja vu all over again.” That’s the way the market always works.

What’s your take?