20 years, to the day, after Greenspan’s iconic speech that warned of the unintended consequences of “irrational exuberance,” we find ourselves, yet again, in the midst of perhaps the largest asset bubble in history. In fact, Greenspan’s warning, previously made in a speech on Dec. 5, 1996, eerily reflects many of the same concerns surrounding the market today with low interest rates and lower risk premiums driving an unprecedented equity bubble.
“Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. 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?”
Of course, since Greenspan’s initial warning in 1995 U.S. equity markets have bubbled up and crashed twice. Now, with the broader indices up 500-600%, one has to wonder whether “irrational exuberance” has once again “unduly escalated asset values.”
Meanwhile, the lower inflation expectations that Greenspan warned of, combined with endlessly accommodative Fed policies, have continued to push treasury yields ever closer to 0. For that reason, per Bloomberg, these days Greenspan seems to be more worried about the debt bubble than the equity bubble.
Even after the pullback, bonds look more like the real bubble today — the 10-year term premium only climbed back above zero three weeks ago after hitting an unprecedented minus 0.75 percentage point in July.
Greenspan himself now says he’s more worried about debt than equity, speaking in an interview with the Wall Street Journal published Dec. 3. He also recognized his warning had had little impact; and repeated his view that bubbles are almost impossible to stop once they get going.
And, after a massive expansion of the Fed’s balance sheet, Greenspan has only his successors to thank for his latest worries.
Of course, as Greenspan warns, “bubbles are almost impossible to stop once they get going.”