Irrational Exuberance — Version 2.0
The 1990’s are officially back. Reuters:
Former U.S. Federal Reserve Chairman Alan Greenspan said on Wednesday he feared a “dramatic contraction” in Chinese stocks but said the global economy may be able to shrug off a drop in asset prices. Addressing a meeting in Madrid via teleconference, Greenspan said the recent boom in Chinese stocks could not last. “It is clearly unsustainable,” he said “There’s going to be a dramatic contraction at some point.”…
Greenspan, who stood down as Fed governor last year, said cheap Chinese imports were one of the elements stoking world growth, along with Eastern European workers and the knock-on effects on lower inflation and rates. “In the last five years, the world as a whole is a growing faster than at any time in the world’s history,” he said. “It can’t last and it won’t last because it’s a one-shot adjustment.”
On December 5, 1996, Alan Greenspan spoke of Irrational Exuberance in the US stock market. The NASDAQ was at about 1000 then, and promptly quintupled to over 5000 a little over three years later. Question: will there be three years of unbelievable gains now in the red-hot Shanghai market before the wheels come off?
UPDATE
Just like in the 1990’s, we are now seeing very smart and accomplished economists and analysts predicting that the sky’s the limit. WSJ:
Vernon Smith, a Nobel laureate economist, is so bullish on stocks that he’s put money in small drug companies — investments he “wouldn’t have touched in the late 1990s,” he says. Louise Yamada, a longtime Wall Street market analyst, sees the Dow Jones Industrial Average climbing to 16000 as part of a bull market that she compares with the post-World War II boom. Fritz Meyer, who develops investment strategy for AIM Investments, a $149 billion money management group in Houston, sees stock gains stretching as far as the eye can see.
A decade long bull market is supposed to be a once-in-a-generation rarity: There was one in the 1920s, another in the 1950s and a third in the 1990s. Historically, most bull markets have run their course in three or four years. That means, recent stock-market highs notwithstanding, the current one should be on its last legs…
seven years after the great bull market of the 1990s thudded to a halt, a small group of seasoned investors — including some with no vested interest in selling stock — believe the U.S. market is in the midst of another long period of gains. This group of extreme optimists believes that global economic strength will keep shares rising for much longer than has been common in previous eras. Not only China and India, but also Japan, Western Europe, Latin America and other parts of Asia are feeding on one another…Optimists also point out that the S&P 500 is currently trading at about 18 times its constituent companies’ earnings over the past 12 months, not much above the post-war average P/E ratio of 16 and far below the high 30s, the peak during the tech-stock bubble…
Such sentiments give traditionalist investors the shivers, because they can signal that excess is percolating back into the market. Many cite Yale economist Irving Fisher, who shortly before the 1929 crash famously said, “Stock prices have reached what looks like a permanently high plateau.” “Whenever there is a market surge, people invent New Era stories to justify it,” says Robert Shiller, the Yale economics professor who wrote “Irrational Exuberance,” a book about the 1990s stock bubble.
Hmmm. Maybe this time really will be different. Stay tuned.