Irrational Exuberance

The Problem With Forecasts

Talk about conflicted. Just ask yourself WHY Wall Street spends BILLIONS of dollars each year in marketing and advertising trying to keep you invested at all times. Since optimism is what sells products, it is not surprising, as we head into 2017, to see Wall Street’s average expectation ratcheted up another 4.7% this year.

Weekend Reading: The Beginning Of The Ending

The only other time in history where the Dow advanced 5000 points over a 24-month period was during the 1998-1999 period of “irrational exuberance” as the Fed was fighting the fears an inflationary advance, while valuations were rising and GDP growth rates were slowing. Maybe it’s just coincidence. Maybe “this time is different.” Or it could just be the inevitable beginning of the ending of the current bull market cycle.

20 Years Later, Greenspan's "Irrational Exuberance" Has Become Even More Irrational

December 5, 1996:  “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?"

Frontrunning: December 5

  • Italy Sinks Into Political Limbo as Defeat Sweeps Renzi Away (BBG)
  • Investors Shrug Off Italy Referendum Result (WSJ); Markets Rise After Italy Turns Down Referendum (BBG)
  • Italy’s ‘No’ Poses Trouble for Eurozone (WSJ)
  • Oil tops $55 for first time in 16 months as OPEC deal fuels buying (Reuters)
  • Merkel regrets Renzi resignation but will work with new Italy government (Reuters)

The Bull Giveth, The Bear Taketh, & You’re Not Passive

Speculators often prosper through ignorance; it is a cliché that in a roaring bull market knowledge is superfluous and experience a handicap. But the typical experience of the speculator is one of temporary profit and ultimate loss.

In His Own Words: From Maestro To Mea Culpa

Alan Greenspan is shamelessly trying to get ahead of what he seems to be calling the mob, the crazies who at some point will start digging into what he actually did at the Fed rather than simply accepting the myths that he still manages to live by.

Investors Are Sticking With Pavlov's Dog Until Everything Breaks

Remember when “bad news is good news” first leapt into common parlance? At first it was used as a way to describe the reaction function of Fed policy-makers. It was taken as a cute turn of phrase in encapsulating the state the of the world. Over time, as Bloomberg's Richard Breslow explains, it’s morphed into an ugly and cynical way of justifying mindless investing behavior.

Low-Volatility Stocks At Risk As Credit Cycle Ends, UBS Warns A Crash Is Coming

UBS' Paul Winter believes we are witnessing the end of the credit cycle - earnings growth rates are flat, and the stock market impact has been increasing. Importantly, from a risk perspective, Winter warns that Systemic Risk is rising, and Economic Policy Uncertainty has hit all-time highs, warning that the key risk today lies in low-volatility stocks and the broad market's equity risk premia - "either earnings need to pick up dramatically, or alternately, equities would need to correct by around 20% to bring the equation back into equilibrium."