On December 5, 1996, Alan Greenspan gave his famous Irrational Exuberance speech.

At the time, the S&P500 was at 744.38. It blew through that number today, closing at 700. We’re still 350 points above the Dow’s closing price of 6,437.10; The Nasdaq is a stone’s throw (22 points) from its closing price of 1,300.12.

In other words, the SPX is now lower than when Greenie gave his infamous speech 13 years ago, and the other indices are just above their levels when Al was suggesting that buyers had gotten too, well exuberant.

Astonishing . . .

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1996 S&P500 Daily Chart

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Source:
Remarks by Chairman Alan Greenspan At the Annual Dinner and Francis Boyer Lecture of The American Enterprise Institute for Public Policy Research,
Washington, D.C.December 5, 1996

http://www.federalreserve.gov/boarddocs/speeches/1996/19961205.htm

Category: Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

32 Responses to “Irrational Exuberance? We Are Now Below It . . .”

  1. Mike in Nola says:

    How do REAL earnings compare to that time period?

  2. Marcus Aurelius says:

    Irrational exuberance replaced by rational trepidation and loathing.

  3. AGG says:

    Barry,
    This is a snippet from a piece by Hutchinson at The Prudent Bear. The whole thing explains quite clearly how this got out of hand AND how to fix it. His point is that the thing wasn’t “irrational” at all. It was rational as insurance companies selling life insurance policies for complete strangers (There was money in it, after all) only to watch the homocides spike on the insured victims. Something had to be done and it was. The same applies now for derivatives. Expecting traders to have a conscience is unrealistic:

    In the early years of the London insurance market, it was possible to buy a life insurance policy on a complete stranger. Then insurance companies noticed the high incidence of unexpected homicides among their lives assured, and the concept of insurable interest was devised, codified by the Life Assurance Act of 1774. Today, you can’t buy a life insurance policy unless you can demonstrate some loss by the assured party’s death. The business is safer that way!

    The same consideration must surely apply to the CDS market. The legitimate hedging purpose of CDS today represents only a tiny proportion of contracts outstanding. The U.S. taxpayer is already on the hook for $150 billion, with more to come, through the inept CDS operations of the insurance behemoth AIG. With multiple bankruptcies and huge market instability owing at least part of their provenance to CDS, the public policy consideration for closing or at least sharply restricting the CDS market is even clearer than that promoting the restriction of the insurance market in 18th century London (at least taxpayers weren’t expected to pick up the tab for insurance policies on murder victims!)

    As a minimum, therefore, CDS writing should be restricted to those holding bond, loan or swap obligations against which CDS might reasonably hedge. CDS should be distinguished from stock short positions and stock options (which have similar theoretical possibilities) because their greater leverage and higher outstanding volume make them uniquely dangerous. Such a market would be highly illiquid, but it would fulfill CDS’s essential function of enabling credit risk transfer. CDS’s other advantages, of demonstrating credit spreads over a public marketplace, allowing the hedging of baskets of similar credits, providing an instrument for hedge fund “investment” and making huge returns for the major dealers, would be lost. However, CDS’s destabilizing effect on global financial markets would also be lost, and the cost to taxpayers of rescues for those major institutions which had either got the CDS market wrong or were victims of CDS “bear raids” would be eliminated.

    The free market is a wonderful thing. However, allowing unrestricted free markets in everything, without regard to the real-world economic effect of those markets, is a Whig shibboleth similar to the “Repeal the Corn Laws” unilateral free trade policies that destroyed Britain’s economic strength in the 19th century. The great and economically highly sophisticated Tory Prime Minister Robert Lord Liverpool, a generation prior to the mid-century free traders, also believed in free markets, but was a realist in their application to the world in which he lived.

    The real world is messy and does not conform to simplistic equations either mathematical or moral. The wise policymaker will legislate accordingly, providing the maximum market freedom but inserting restrictions where the temptations to malfeasance are too great. The CDS market forms an open and shut case for restrictive regulation.

  4. spudvol says:

    …Greenie gave his infamous speech 3 years ago…

    Mmm, think you meant 13 years ago.

  5. Paul Jones says:

    Greenspan’s worry 13 years of inflation ago?

    The SNP at 744 was crazy high!

    What, pray tell, did he think fair value was?

    That, my friends, is the bottom…

  6. @AGG: I think you’re saying, in a nutshell, CDS’ are nothing more than gambling. Nothing socially redeemable took place with the writing of these “insurance” contracts that later became financial weapons of mass destruction. It was gambling for gambling’s sake.

    Oh, but they were clever gamblers. They made money hand over fist. They used fancy models and Ph.D quants to show why their speculations were valid. They bought stadium naming rights or sponsored sports teams to get their names plastered all over the place (always beware the company that starts sponsoring sports teams and naming stadiums) even if most of the sports fans didn’t even know what the hell it was they did. Then they were blindsided by reality. The house, literally, called in their chips.

    And now, they depend on the munificence of the real creators of value to bail them out. They now depend on the sweat of the farmer, the carpenter, the street lawyer, the truck driver, the schoolteacher–in sum, the little people that made all of their gambling a terrific good time–to bail them out of their fantastic mistakes. As BnT says, the ants get to rescue the grasshoppers, again. So the grasshoppers can find new ways to waste time and money. Because heaven forbid, without grasshoppers, where would the ants be? Of course, they’d still be ants, but with just a little lighter burden for not having to carry the grasshoppers.

    Whatever legislation that results from this fiasco should recognize clearly and succinctly from whence all this wealth originates–which is to say, from the millions of tiny decisions ordinary people navigating the vicissitudes of life make every day. It most assuredly does not come from the swapping of gambling chits by the titans of industry and finance.

    The very best means of controlling the gambling industry known as CDS is simply to let them suffer the consequences of their actions. Some may think gambling immoral. Perhaps it is. But using the extortionary power of the state to force the rescue of broken gamblers by prudent and hard-working souls is the essence of immorality. It’s hard to see how anything we’ve done thus far is anything but immoral.

  7. Paul S says:

    I like the way Floyd ended hi sblog entry today:

    There are five stocks now in the Dow that trade for more than twice their level when Mr. Greenspan spoke, and six that trade for less than half as much. (Prices are through about 11 a.m. today.)

    The winners:
    Wal-Mart, up 282%
    Exxon Mobil, up 180%
    United Technologies, up 136%
    I.B.M., up 130%
    McDonald’s, up 120%

    The losers:
    General Motors, down 95%
    Citigroup, down 89%
    Bank of America, down 86%
    Alcoa, down 63%
    DuPont, down 63%
    General Electric, down 52%

    Fucking WalMart!

  8. retrogrouch says:

    Is the GOP willing to talk about “privatizing social security” still?

  9. try2bamused says:

    Looks like pretty major support at the 680-640 level. Might be time for me to think about covering soon.

  10. KidDynamite says:

    AGG, Curmudgeon – the problem isn’t the product “CDS” – it’s the regulation, settlement, and oversight of CDS… if we had no margin requirements for stocks and options, or longer settlement periods (stock settlements were shortened from t+5 to t+3 a little more than a decade ago precisely to reduce counterparty settlement risk) – the product would (potentially) be fine.

    we need, and will likely get, a central CDS clearinghouse with stringent margin requirements, so that, in the slightly bastardized words of Hondo from Top Gun, “no one’s mouth can write a check their body can’t cash.”

  11. deanscamaro says:

    “Is the GOP willing to talk about “privatizing social security” still?”

    Can you imagine the public outcry today if Bush The Bonehead were still around pushing the personal retirement accounts, leaving it up to the powerless individuals to try and build their retirement accounts into something through investing??? Oh, sure!!! It was nothing but a means to promote the investment advisor field of the financial world. Sure, you can trust those guys!

  12. Is the GOP willing to talk about “privatizing social security” still?

    you mean so that there would be something, other than more promises to Tax the Future, held w/in it?

    I’d think anyone interested in the Future of the Country would be willing to have that conversation..

  13. mike from philly says:

    Do you really think Social Security will be around in the future? Where do you think the money is coming from to pay for the sins of AIG and Wall Street. How is the government going to cover the SS outflows when its tens of trillions of dollars in debt?

  14. Fredex says:

    Powerless individuals ? You mean those millions of people who would be marching on Wall Street with pitchforks and torches? The topic of bailouts would not be on their agenda.

  15. and to the crack about ‘powerless individuals’, the QOTD seems apt:

    “A person buying ordinary products in a supermarket is in touch with his deepest emotions.” –
    John Kenneth Galbraith

    the Myth of ‘powerlessness’ of promulgated by the very forces, “Big Government”, and its fellow Clients, that make it seem so.

    Maybe we need to remember that the Constitution enumerated, not proscribed, the Powers the Federal Government was supposed to have..

  16. Robert M says:

    I have never understood how people keep misrepresenting what Greenspan actually said. Here it is, “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?

    Clearly no one understands even now.

  17. AGG says:

    The Curmudgeon Says: The very best means of controlling the gambling industry known as CDS is simply to let them suffer the consequences of their actions.

    Of course. That’s the entire reason that Wall Street used CDSs; i.e. you could pass the buck on responaibility. That is what is so criminal about it. It’s called MENS REA in law. With full intent of malfeasnace, they engaged in these CDSs. Hutchinson is just being realpolitic. He says you won’t stop them with a sermon in the real world. Only strict regulation will. But these rats are smart. As soon as you force them to take responsibility, they’ll switch to something else. Our sophistic legal system is the first thing that needs to be reformed and because that would put a stop to this bullshit lickity split, is the very last thing that will be reformed.
    We are all simply left with our individual responsibility to think and think HARD about what licit or illicit and immoral activity our buying and selling habits are encouraging or discouraging. Violent protest is unnecessary; an uncooperative attitude towards government or business theft is. I know some here see a marked difference between government beaurocratic tyranny and business monopololistic market cornering. I don’t. Those who privitize water and then tell me I’m free not to pay the price of the only water around are worthy of rat poison. A government that squeezes the life out of you with taxes is also worthy of rat poison.

  18. AGG says:

    KidDynamite,
    That’s what Hutchinson says and I agree. Go to the Prudent Bear and click on it. The full article even shows how canny CDS traders can (and did) shit can a financial stock. These guys are good at demolition of equity. Rat poison for em’, I say.

  19. AGG says:

    Folks, this is the money part of what Hutchinson proposes. It castrates the thieving. It would work.

    CDS’s other advantages, of demonstrating credit spreads over a public marketplace, allowing the hedging of baskets of similar credits, providing an instrument for hedge fund “investment” and making huge returns for the major dealers, would be lost. However, CDS’s destabilizing effect on global financial markets would also be lost, and the cost to taxpayers of rescues for those major institutions which had either got the CDS market wrong or were victims of CDS “bear raids” would be eliminated

  20. CNBC Sucks says:

    Not sure how we wound up talking about Social Security, but I’ll be your Huckleberry. It’s easy to fix: Tax the rich more, tax the rich more, tax the rich more. Implement The Great CNBC Sucks Registered Republican Max Tax Plan. As a registered Republican, I think that black Democrat Obama’s tax increase plan is embarrassingly wimpy; in contrast, I would create new tax brackets on the high end, jack up the marginal rates on the highest brackets up to the 70-80% levels or maybe even the Eisenhower-level 90%, then slap a Donald Trump-style asset tax on their ass. I would even call it a “French-style asset tax” just for scorn. I would also install a death tax that will be less pleasant than death itself. The government coffers will be flowing, no more national debt, and a nice Social Security retirement for everyone, including the illegal aliens my fellow Republicans brought into this country for cheap labor. No muss, no fuss.

    Of course, unfortunately, such a scenario is politically unrealistic. It’s not that the rich don’t want to pay – you have people like Warren Buffett and Bill Gates and the Rockefellers who have been clamoring for years to be taxed more because they fear the end of meritocratic America. Rather, there are too many poor and middle-class Republicans and Libertarians who would defend the rich out of pure nonsensical demagoguery and the mythology of rugged American individualism with which they have been brainwashed. The rich never have to worry as long as poor and middle-class people continue to identify with Republican and Libertarian ideologies that destroy the poor and middle class.

  21. Steve Barry says:

    “You’re Welcome America” – Sir A.G.

    Funny paradox…CNBC guests always recommend value stocks that are increasing their dividends…and when GE slashes their’s, CNBC says it should help the stock, becaus the company is saving money. So if a company justs ups its dividend, then cuts it, then ups it over and over, the stock should rocket.

  22. Marcus Aurelius says:

    As for Social Security, the oft maligned Al Gore warned us that there was no “lock box” where our money was being kept. He was laughed at, at the time. Not so funny, now.

  23. Marcus Aurelius says:

    Mark E Hoffer Says:
    March 2nd, 2009 at 10:03 pm

    Maybe we need to remember that the Constitution enumerated, not proscribed, the Powers the Federal Government was supposed to have..
    ______

    I think you have that backwards. By my reading, the Constitution (at least the Bill of Rights) – in forming s Republic – set proscriptions on the powers of the Federal Government. For instance, the First Amendment proscribes the Government from restricting free speech:

    “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.”

    Other Amendments are similarly proscriptive. If not, the tyranny of pure Democracy would rule the minority.

  24. OkieLawyer says:

    @CNBC Sucks: Amen, brother.

    @Mark E Hoffer: Let me pile on to what Marcus Aurelius said:

    ARTICLE NINE The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people.

  25. zero529 says:

    Somewhat OT, but does anyone else think that maybe Obama’s insistence on preserving the private control of banks is just the ultimate head-fake? Had the pinko bastard marched into the Oval Office and immediately ordered nationalization of these venerable institutions, the GOP would have been all over him (and the MSM would have had a field day). Instead he gets to say, “Look, we really didn’t want to do this, we did the best we could to avoid it, but we have no other choice.” Never mind that our nation may lie in ruins by the time it actually happens . . .

  26. Anonymous Jones says:

    I love that great question, “Do you really think social security will be around in [x number] of years?” Ummm, yes, I do. Do those who ask this inane question realize that this is a democracy? Do those who ask this inane question realize the demographic implications of an aging population on the voting process? Can anyone really believe that a democracy run by those who receive the benefits of social security will not cut *everything else* in the federal budget and demand *as many tax increases as possible* to maintain the current entitlement program? People are so f’ing stupid, it amazes me sometimes. Listen, I’ll cut the suspense for you…there’s going to be social security as long as this is a solvent democracy. Dear lord, the stupidity is too much for me sometimes.

  27. This term is often used in law as equivalent to mentioned specifically, designated, or expressly named or granted; as in speaking of enumerated governmental powers, items of property, or articles in a tariff schedule.

    West’s Encyclopedia of American Law, edition 2. Copyright 2008 The Gale Group, Inc. All rights reserved.
    http://legal-dictionary.thefreedictionary.com/enumerate

    pro·scribe (pr-skrb)
    tr.v. pro·scribed, pro·scrib·ing, pro·scribes
    1. To denounce or condemn.
    2. To prohibit; forbid. See Synonyms at forbid.
    3.
    a. To banish or outlaw (a person).
    b. To publish the name of (a person) as outlawed.

    ——————————————————————————–

    [Middle English proscriben, from Latin prscrbere, to put up someone's name as outlawed : pr-, in front; see pro-1 + scrbere, to write; see skrbh- in Indo-European roots.]

    ——————————————————————————–

    pro·scriber n.

    The American Heritage® Dictionary of the English Language, Fourth Edition copyright ©2000 by Houghton Mifflin Company. Updated in 2003. Published by Houghton Mifflin Company. All rights reserved.

    add’l: http://clusty.com/search?v%3afile=viv_1080%4020%3aROfq02&v%3aframe=list&v%3astate=root%7cN795&id=N795&action=list&sw=%7cGovernment%20Has%20Only%7c&sec=1236068731&

    simply, my intent, with the above comment, was to underline the fact that the Constitution specifically lists the certain powers that Federal Government may properly engage. It was written, to anyone’s best understanding, to be specific in that regard.

    The Bill of Rights, the first 10 Amendments, are, technically, Amendmends to the Constitution. That Amendments further clarify, or, by addition, proscribe, the original intent, would seem definitional.

    see next:

  28. “Before the creation of the U.S. Constitution in 1787, constitutional amendments had already been instituted as part of several early state constitutions. The pioneering framers of these state constitutions recognized the need to incorporate an element of flexibility into Constitutional Law, and they provided for constitutional amendment through the legislature or through special conventions. However, the first national Constitution of the United States, the Articles of Confederation, did not have such flexibility. Amendment of that document required a unanimous vote of Congress, nearly impossible to achieve.

    The Framers of the U.S. Constitution sought to avoid the inflexibility of the Articles of Confederation. James Madison, one of the principle architects of the Constitution, argued in The Federalist Papers that the new compact’s amendment procedures, unlike those of the old Articles, protected “equally against that extreme facility, which would render the Constitution too mutable, and that extreme difficulty, which might perpetuate its discovered faults.”

    Proving the truth of Madison’s contention, the first ten amendments to the Constitution were passed as a package by the first session of Congress in 1791. This group of amendments is called the Bill of Rights. The Bill of Rights fulfilled a promise that the backers of the Constitution, known as the Federalists, had made during the ratification procedure of the Constitution. It guarantees specific liberties relating to (1) rights of conscience, including the freedoms of speech, press, religion, and peaceable assembly (First Amendment); (2) rights of the accused, including freedom from “unreasonable searches and seizures” (Fourth Amendment), freedom from compulsory Self-Incrimination (Fifth Amendment), the “right to a speedy and public trial, by an impartial jury” and with legal counsel (Sixth Amendment), and freedom from “excessive bail” and “cruel and unusual punishments”(Eighth Amendment); and (3) rights of property, including freedom from seizure of property without “due process of law” (Fifth Amendment).

    West’s Encyclopedia of American Law, edition 2. Copyright 2008 The Gale Group, Inc. All rights reserved.
    http://legal-dictionary.thefreedictionary.com/Constitutional+Amendment

    the Constitution–ratified in 1789, and The Bill of Rights–ratified in 1791, are two different things..

  29. and, sorry, one last one..

    the difference is crucial to understand the Source of the Powers being discussed.

    if the font Was the FedGov, the document would be Proscriptive of those powers..

    though, it isn’t.

    The Source of the Power is the People, each, and every. Therewith, the powers granted to the Federal Government are Enumerated, listed specifically, and, as the 9th and 10th Amendments make clear, further Proscribed..

  30. batmando says:

    “hat Amendments further clarify, or, by addition, proscribe, the original intent, would seem definitional.” Agreed.

    “the Constitution–ratified in 1789, and The Bill of Rights–ratified in 1791, are two different things..”

    So, yes, the original Constitution specifically enumerated certain Federal powers and the Bill of Rights was a separate Act of Congress; however, amend – a change made TO a written constitution – thus, by amendment, the changes, e.g., the Bill of Rights, and its proscriptions, become part of the Constitution and, in that sense, not two different things.

  31. batmando,

    I hear ya, I think I said as much, here: “if the font Was the FedGov, the document would be Proscriptive of those powers..

    though, it isn’t.

    The Source of the Power is the People, each, and every. Therewith, the powers granted to the Federal Government are Enumerated, listed specifically, and, as the 9th and 10th Amendments make clear, further Proscribed..”

  32. Ken says:

    Quoth The Curmudgeon: “As BnT says, the ants get to rescue the grasshoppers, again.”

    In the fable, the ant does nothing of the sort. The grasshopper starves to death in the winter.

    In the real world, the ants rip off the grasshopper’s legs and head and carry the tasty parts back to the nest to feed their larvae.

    Feel free to extend either to the current financial situation as you see fit.