Irrational Exuberance is Back!
"Of all the contrivances for cheating the laboring classes of mankind, none has been more effective than that which deludes them with paper money." ─ Daniel Webster
It was 1996. Alan Greenspan, the architect of the largest financial house of cards in history, remarked that the markets might be experiencing a whiff of “irrational exuberance.” His observation caused a minor crash in those markets at the time, but the exuberance continued until reaching a dizzy height in January of 2000. From there the bloom came off the rose for a few years. Hope and Fear took a few rounds from Greed and Glory.
For a few years you could find a pessimist on Wall Street if you looked hard enough. But as we arrive at the ten year anniversary of Mr. Greenspan’s fateful remarks the punch bowl has been refilled to overflowing with paper hooch and “irrational exuberance” is back stronger than ever.
Unanimous thinking makes contrarian curmudgeons like this writer nervous. And I can’t recall a time when sentiment was as uniformly rosy as it is now, not even when the party was roaring in 1999.
Ten out of ten Wall Street
“gurus” interviewed by USA Today for its big New Year’s spread headlined “UP UP UP” predicted the market would go higher in 2007. Not a bear in the bunch.
The Wall Street Journal went so far as to suggest in a headline, “ ‘Irrational Exuberance’ May Now Be More Rational.” At what level of insanity does irrationality suddenly become the soul of reason?
Newsweek was giddy at the prospect of “a world awash in cash.” “Let the Good Times Roll” was the headline. The editors expressed an unshakable faith in regulators, central bankers and markets for paper assets to lead the world from expansion to “explosion.”
I ask myself, upon what is the unanimous vision of exploding prosperity based? Could it be our wonderful productivity? I haven’t seen a new factory built in my lifetime. Or the efficiency of the digital age? I’d like to have a dollar back for every hour I’ve wasted on a computer. What is it that is making us so prosperous?
The answer flits like a garden butterfly, crinkles like Santa’s smile, riffles and flops in solid packs and banded sheaves. Our “irrational exuberance” is floating on an ocean of paper. A vast and mighty sea of paper promises to redeem other paper promises with more promises still. And every promise leads back to the primal promise made by the Federal Reserve and its still popular tokens, known as dollars, which are finally promises to pay nothing at all.
The world’s appetite for paper has never been greater. Paper assets represent a higher portion of Gross Domestic Product than they ever have in history. In the last thirty years the paper assets held on Wall Street have exploded from under two percent of GDP to over 20%.
Hedge funds have created mirrors-on-the-wall financial fun houses where they have never been seen before. Smoke rises from a smoldering pile of exotic derivatives. Market wiz kids fan it into the fun house. Stocks, commodities, real estate and now finally Wall Street financial firms themselves have become objects of leveraged speculation driving irrationality from market to market like a bee wandering through a meadow full of daisies.
Professional contrarian, Robert Prechter, pointed out recently that the riskiest speculations have been completely democratized by the “For Dummies” series of how-to-do-it books. Dummies can now become experts on a variety of high risk investments such as Exchange-Traded Funds, Commodities, Hedge Funds, and a little past the peak, House Flipping.
In this love affair with paper the old Wall Street saw keeps coming to mind, “When everybody is thinking the same, nobody is thinking.” The wisdom of such observations springs from an older and more experienced collective consciousness. It’s a wisdom that grew out of the ashes of lost fortunes and shattered dreams.
The voice of “irrational exuberance” is one that we hear at manic tops, when the blood is running hot and the world is at our feet. It shouts down the old wisdom. It hollers “UP UP UP” and whispers, “This time it’s different.”