Sixteen years ago today, Alan Greenspan spoke the now infamous words "irrational exuberance" during an annual dinner speech at The American Enterprise Institute for Public Policy Research. Much has changed in the ensuing years (and oddly, his speech is worth a read as he draws attention time and again to the tension between the central bank and the government). Most critically, Greenspan was not wrong, just early. And the result of the market's delay in appreciating his warning has resulted in an epic shift away from those same asset classes that were most groomed and loved by Greenspan - Stocks, to those most hated and shunned by the Fed - Precious Metals. While those two words were his most famous, perhaps the following sentences are most prescient: "A democratic society requires a stable and effectively functioning economy. I trust that we and our successors at the Federal Reserve will be important contributors to that end."
The greater story behind Mark Carney’s appointment to the Bank of England may be the completion of Goldman Sachs’ multi-tentacled takeover of the European regulatory and central banking system. But let’s take a moment to look at the mess he is leaving behind in Canada, the home of moose, maple syrup, Jean Poutine and now colossal housing bubbles. George Osborne (who as I noted last month wants more big banks in Britain) might have recruited Carney on the basis of his “success” in Canada. But in reality he is just another Greenspan — a bubble-maker and reinflationist happy to pump the banking sector full of loose money and call it “prosperity” before the irrational exuberance runs dry, and the bubble inevitably bursts.
Is There a Better Way to Allocate Stocks?
Reports that the housing sector is recovering has generated more than a little irrational exuberance among investors regarding financials.
Since the EU-Summit, US and European equity markets have (in general) outperformed. From being in sync before the Summit, US equities went into the weekend with a sell-off, which then spurred a short-squeeze push as the S&P 500 was over-exuberant (relative to European equities) on the way up at the start of last week. That cracked back to reality at the end of last week - squeezing the over-levered longs to a significant underperformance relative to European equities. It would appear that in the last 24 hours, US equities are now rallying back to that European 'surreality'. Surreal because European stocks remain dramatically exuberant relative to European (peripheral spreads unch and AAA massively bid) and US (Treasuries bid) bonds and European corporate and financial credit. As we stand, the S&P 500 has retraced back to Europe's 'fair' perspective.
For the past six months we have extensively discussed the topics of asset depletion, aging and encumbrance in Europe - a theme that has become quite poignant in recent days, culminating with the ECB once again been "forced" to expand the universe of eligible collateral confirming that credible, money-good European assets have all but run out. We have also argued that a key culprit for this asset quality deterioration has been none other than central banks, whose ruinous ZIRP policies have forced companies to hoard cash, but not to reinvest in their businesses and renew their asset bases, in the form of CapEx spending, but merely to have dry powder to hand out as dividends in order to retain shareholders who now demand substantial dividend sweeteners in a time when stocks are the new "fixed income." Yet while historically we have focused on Europe whose plight is more than anything a result of dwindling cash inflows from declining assets even as cash outflow producing liabilities stay the same or increase, the "asset" problem is starting to shift to the US. And as everyone who has taken finance knows, when CapEx goes, revenues promptly follow. Needless to say, at a time when still near record corporate revenues and profit margins are all that is supporting the US stock market from joining its global brethren in tumbling, this will soon be a very popular point of discussion in the mainstream media... in about 3-6 months.
The Fed’s promise to use more QE should the economy falter is supporting gold.
The global economic picture remains grim, with euro zone economic sentiment falling more than
expected in April and the US job market recovery showing signs of a slowdown.
Apple earnings and the tech boom and indeed possible tech bubble remains one of the primary
drivers of continuing irrational exuberance and risk appetite.
The poor and deteriorating economic backdrop is gold supportive.
22% of the Q1 earnings season (by market cap) is over, and anyone listening merely to soundbites and reading media headlines would likely think that stocks have soared as a result of a relentless parade of beats. One would be mistaken. In fact, as the chart below shows, there is something very wrong with this earnings season...
The Fed is clearly worried about the economy. Ben Bernanke's latest speeches aren't exactly inspiring. It is as if he thinks the rosy(ier) numbers are some prank being played upon him by the gods; that soon this will all be taken away. He is right. He admits he doesn't understand why the economy is the way it is. Reality doesn't fit his theory. ("It's supposed to work, dammit!") So, what do you do when you are the head of the world's biggest printing press, and don't know what else to do? Why QE3 of course.
Deals from last week tell me that we are are again in a credit bubble.
Every time we see oil prices go up we hear that it will cause inflation and/or the economy will go into the tank. The premise is wrong because that has never happened.
S&P futures have moved more than 20 points since 3:30. The first big move was on the back of a story that Greece really will commit to the whatever the EU demands. The second move was after China re-pledged to invest in Europe. IG17 is about 1.5 bps tighter than the wides of the day and is unchanged this morning. In Europe, Main is unchanged while stocks are up about 1% across the board. Even the 10 year bond which saw yields drop from 1.98% to a low of 1.92% are only back to 1.94%. Why? Sentiment seems overly bullish, overly complacent, and the credit markets are sending a warning sign to stocks about irrational exuberance.
In this very informative interview between The Browser and Peter Boettke, the professor of economics discusses the contributions made by the Austrian School, and explains the various nuances of the economic school by way of recent books by "Austrians." He also explains what we can learn from Mises and Hayek, and argues that economics is the sexiest subject.
A look at one of those "new ideas" to resolve the debt limit impasse. I think it is a No Sale.