The Mother Of All Irrational Exuberance

Authored by David Stockman via Contra Corner blog,

You could almost understand the irrational exuberance of 1999-2000. That's because everything was seemingly coming up roses, meaning that cap rates arguably had rational room to rise.

But eventually the mania lost all touch with reality; it succumbed to an upwelling of madness that at length made even Alan Greenspan look like a complete fool, as we document below.

So doing, the great tech bubble and crash of 2000 marked a crucial turning point in modern financial history: It reflected the fact that the normal mechanisms of honest price discovery in the stock market had been disabled by heavy-handed central bankers and that the natural balancing and disciplining mechanisms of two-way markets had been destroyed.

Accordingly, the stock market had become a ward of the central bank and a casino-like gambling house, which could no longer self-correct. Now it would relentlessly rise on pure speculative momentum---- until it reached an asymptotic top, and would then collapse in a fiery crash on its own weight.

That's what subsequently happened in April 2000 when the hottest precincts of the stock market---the NASDAQ 100 stocks----began a perilous 80% dive; and it's also what happened in the broader markets-----including the S&P 500---in 2008-2009, when a thundering 60% plunge unfolded in a hardly a year's time.

So with the market raging in self-fueling momentum at the 2600 mark on the S&P 500, we reflect back to the great dotcom crash for vivid reminders of what happens next. That earlier meltdown is especially pertinent because in many ways today's stock market mania is far less justified than the one back then.

Moreover, the dotcom version was also the first great central bank fueled bubble of modern times---a creature that market participants understandably did not fully grasp. Yet to its everlasting blame, the Fed's subsequent experiments in reflationary bailouts of the casino gamblers has only caused Wall Street's muscle memory to atrophy further.

Indeed, after 30 years of Greenspan-style Bubble Finance and two devastating crashes, Wall Street is even more credulous today than it was on the eve of the tech crash. Back then, in fact, there was a considerable phalanx of Wall Street old-timers who warned about the dotcom insanity. Now almost no one sees this one coming.


Indeed, today's nutty forecast by Goldman Sachs that the S&P 500 will hit 3,100 by the end of 2020 makes Greenspan's earlier bubble blindness look clairvoyant by comparison.

In hindsight, Alan Greenspan did see it coming early on--- when he broached the "irrational exuberance" topic in passing during a speech in December 1996. Unfortunately, he has mostly been dinged for being allegedly way too early in making the call.

In fact, we don't think he was making much of a call at all---he's was just musing out loud with no intention of reining-in the then rampaging bull. What he actually did was to conduct several gumming fests at subsequent Fed meetings and then diffidently raised interest rates a single time by a pinprick 25 basis point in April 1997.

After that the Maestro (so-called) apparently forgot all about "irrational exuberance" even as that very thing soon began infecting the entire warp and woof of the financial system.

In fact, Greenspan's fatuous amnesia became so pronounced that by the very eve of the dotcom crash in April 2000, he proved himself blind as a bat when it comes to central bank created bubbles.

Said the Maestro to a Senate committee on April 8 when asked whether an interest rate increase might prick the stock market bubble:

That presupposes I know there is a bubble....I don't think we can know there is a bubble until after the fact. To assume we know it currently presupposes we have the capacity to forecast an imminent decline in (stock) prices".

At least he got the latter part right. After the NASDAQ had risen from 835 in December 1996 to 4585 on March 28, 2000---or to an out-of-this-world 5.5X gain in 40 months----Greenspan wasn't even sure he was seeing a bubble!

Accordingly, he apparently didn't have that capacity to predict an imminent decline---although the 51% crash to 2250 by the end of the year would seem to have been exactly that.

Indeed, after unloading the above tommyrot at the tippy-top of the NASDAQ-100 bubble, Greenspan proved himself a clueless, pitiable fool when this giant bubble deflated by 81% over the next two years.

In fact, the index ended up in September 2002 almost exactly where it had been when Greenspan spoke the words "irrational exuberance" and then moved along with the Fed's printing press at full speed---claiming there was nothing to see.

Still, back then you could almost have made a (lame) excuse for the Fed chairman's bubble blindness. The Maestro was operating in the early days of monetary central planning and wealth effects management, and its potent capacity to unleash rampant speculation in the financial system was not yet fully understood----even if the underlying monetary theory defied all the canons of sound finance.

Moreover, in addition to rampant bubbles in the financial market, the Fed's money pumping during the 1990s did also seem to be producing some seemingly robust real world effects on main street and in the booming new tech part of the economy.

And, in turn, these positive macroeconomic developments were unfolding in a global political/strategic environment that had suddenly become more benign that at any time since June 1914.

Indeed, the outside world fairly buzzed with positive developments. These included the fact that the internet/tech revolution still exuded adolescent vigor, the government's fiscal accounts were nearing balance for the first time in two decades, the vast market of China was convincingly rising from its Maoist slumber and the Committee To Save the World (Greenspan, Summers and Rubin) had just rescued Wall Street with alacrity from the Long-Term Capital Management (LTCM) meltdown.

Likewise, Europe was launching the single currency and expanding the single market. In place of the Soviet Union, which had disappeared from the pages of history in 1991, Russia, its breakaway republics and the former Warsaw Pact (captive) nations were all bursting out of their statist chains and experimenting with home grown capitalism and reaching out to the west via rising trade and capital flows.

In the US, the combination of the end of the cold war and the internet revolution contributed a doubly whammy to growth and prosperity. When defense spending fell from 7% of GDP on the eve of the Soviet collapse to under 4% by the year 2000, substantial domestic resources were released for private investment and a resulting substantial productivity uplift.

In fact, real private nonresidential investment grew at 7.3% per year from the 1990 pre-recession peak through 2000. That was more than double the still respectable 3.4% rate recorded between 1967 and 1990; and causes the anemic 1.4% real growth of fixed investment between the pre-crisis peak (2007) and 2016 to pale into insignificance.

Notwithstanding all of these positives, however, the great bull stock market of the late 1990s ended-up getting way ahead of itself. That was especially the case during the next 18 months after the Fed's heavy-handed and somewhat panicked bailout of LTCM in September 1998 had confirmed to the newly energized casino gamblers that the Greenspan Put was most definitely operative.

In the Great Deformation we tracked 12 of the highest-flying big cap stocks ("Delirious Dozen") during the period between Greenspan's December 1996 speech and the April 2000 dotcom bust. During this 40-month period, the combined market cap of these 12 leading momo stocks---including Microsoft, Cisco, Dell, Intel, Juniper Networks, Lucent, AIG, GE  and four others---soared from $600 billion to $3.8 trillion.

That eruption did indeed give the notion of trees which grow to the sky an altogether new definition. To wit, the total market cap of the Delirious Dozen grew by 75% per annum for nearly 4 years running; and the future outlook was claimed to be even more fantastic.

For instance, as of mid-2000 Intel was valued at $500 billion and traded at 53X its $9.4 billion of LTM earnings. Yet it was argued that this nosebleed multiple was more than warranted because the company had grown its net income from $1 billion to $9.4 billion during the previous decade, and that there was nothing but blue sky ahead.

Here's the thing, however. Intel was and is a great company that, in fact, has never stopped growing.

But during the 17 years since mid-2000, its net income growth rate has sharply slowed to just 1.79% per annum; and its $12.7 billion of LTM net income for September 2017 is valued at only 15.7X or $210 billion.

In short, at the peak of the tech bubble Intel's market cap had vastly outrun its long run-earnings capacity. Even today it has only earned back 40% of its bubble peak valuation.

Likewise, Cisco was valued at $500 billion in July 200 and sported a 185X PE multiple on its $2.7 billion of LTM net income. And it, too, has continued to grow, posting LTM net income of $9.7 billion for September 2017.

Yet today's earnings are accorded only a 19X multiple after 17 years of 2.4% per annum growth; Cisco's current $181 billion market cap, in fact, sits at just 36% of its bubble peak.

Even the mighty Mr. Softie has experienced pretty much the same fate. Back in mid-2000, it posted $8.3 billion of LTM net income and was valued at $600 billion or 72X. Today its net income has tripled to $23.1 billion, but its PE multiple has receded to just 29X.

Stated differently, Microsoft's net income has grown at 6.1% per annum since the company vastly outran it true value back in early 2000. Accordingly, its market cap gained just 0.4% per annum during the last 17 years. That is, it has taken one of the greatest tech companies of all time upwards of two decades to earn back its peak dotcom era bubble valuation.

And when it comes to the industrial and financial conglomerate empire that Jack (Welch) built, the story is even more dramatic. GE's mid-2000 market cap of $500 billion stands at just $155 billion today; and its PE multiple of 60X has shrunk to just 22X.

In short, that was irrational exuberance back then, and it did not take long for the vast quantities of bottled air in the market cap of the Delirious Dozen to come rushing out. By the bottom in September 2002, four of these companies had vanished into bankruptcy and the market cap of the survivors had imploded to just $1.1 trillion.

That's a fact and you can look it up in the papers. In less than 30 months, $2.7 trillion of market cap had literally ionized.  And these were the leading companies of the era.

None of them, it might be noted, were valued at 280X shrinking net income, as is Amazon today; or at infinite PE multiples like much of the biotech sector and momo hobby horses like Tesla.

More importantly, the promising macro-economic situation at the turn of the century has given way to a world precariously balanced on $225 trillion of debt and the tottering $40 trillion Red Ponzi of China.

Likewise, the benign geo-strategic environment of that era has long since disappeared into the madness of RussiaGate, endless wars in the middle east and Africa and the incendiary confrontation between the Fat Boy and the Donald on the Korean peninsula.

Finally, after 30 years of rampant monetary expansion the central banks of the world have been forced to reverse direction and begin to normalize interest rates and balance sheets.

And that now incepting and unprecedented experiment in massive demonetization of public debts is coming at a time when----after 8 years of business cycle expansion---the US, Japan and most of Europe are running monumental "full-employment" budget deficits.

Even then, these reckless fiscal policies are happening in the teeth of a demographically driven tsunami of pension, medical and welfare spending.

For the period just ended, the S&P 500 companies earned $107 per share on an LTM basis---or just 2% more than the $105 per share posted back in September 2014; and also only modestly more than the $85 per share recorded way back at the June 2007 pre-crisis peak.

Stated differently, on a trend basis S&P 500 companies have grown their earnings at 2.33% per annum over the last decade. How that merits a 24.3X PE multiple on today's 2600 index price is hard to fathom---let alone Goldman's 3100 target for 2020.

Indeed, just to retain today's absurd PE multiple would require $130 per share of GAAP earnings by 2020 at the Goldman target price.

That's right. By the end of 2020 we would be implicitly in the longest business expansion in recorded history at 140 months (compared to 118 months in the 1990s),

Furthermore, the term structure of interest rates will be 200-300 basis points higher according to the Fed's current policies, while the US treasury will be running $1 trillion plus annual deficits and experiencing recurring debt ceiling and financial crises.

Even then you would need 7% annual earnings growth to hold onto today's 24.2X PE multiple at the Goldman S&P 500 target.

As we said, relative to today's casino madness and the Goldman fairy tale hockey stick, Alan Greenspan circa April 2000 looks like a model of sobriety by comparison.

So if that was Irrational Exuberance back in April 2000, what we have now is surely the mother thereof.


HRClinton mcbond Thu, 11/23/2017 - 12:09 Permalink

I left the markets years ago, for PM and BTC. Live in the Parallel Economy, to repudiate the Plantation Masters.They forked me over with PM, but I got the last laugh with BTC, resting in my cw until we go offshore. To really fork (((them))), I converted my IRA into a check and the check into hard cash. It took a few weeks to complete. Given the high Fractional Reserve Ratios, they hate to see all that cash walk out the door. And then have that cash go into CC. Out of sight, out of snooping, out of reach.(Monty Python mocking scene from Holy Grail)

In reply to by mcbond

Radical Marijuana mcbond Thu, 11/23/2017 - 18:54 Permalink

"Irrational Exuberance"That phrase is due to the excessive psychologizing of economics, in ways which tend to deliberately ignore the underlying environmental energy flows. That governments enforce frauds by private banks is the source of the public "money" supplies, which are made out of nothing as debts, in order to "pay" for strip-mining the natural resources of what is still a relatively fresh planet. Meanwhile, about exponentially advancing technologies have enabled those enforced frauds to become about exponentially more fraudulent. That is the context in which various forms of electronic "money" have been able to develop. Various cryptocurrencies are developing within the overall context of the public (now mostly electronic) "money" being created out of nothing as debts at about an exponentially increasing rate.From the perspective of environmental energy flows, cryptocurrencies are still relatively tiny parasites riding on top of much larger parasites. Those cryptocurrencies are consuming relatively large amounts of electrical energy, in ways which are being channeled through the same old social pyramid systems, in ways which make a small percentage of the population appear to become more "wealthy." Given that about exponentially increasing amounts of the mainstream forms of electronic "money" are being made out of nothing as debts, that is driving the diversion of some of that "money" into cryptocurrencies, in ways which are complementary to the overall systems whereby human beings live as reproducing gangs of robbers, while the biggest and best organized gangsters have been able to dominate society with their bullshit stories about what is happening.For various individuals who are experiencing some small streams of the mainstream electronic "money" flowing through them, they may well make excessively psychologized decisions to divert some of that into cryptocurrencies. Since the mainstream electronic "money" is being made by the tens of trillions out of nothing as debts, various cryptocurrencies can quite readily become tiny parasites living on top of those much larger systems of parasites.Since it appears politically impossible to prevent the mainstream electronic "money" from becoming exponentially more fraudulent, for their personal practical purposes, various individuals may well respond to those conditions by "investing" in various cryptocurrencies, which complementary currencies then become tiny parasites riding on the bigger parasite currencies. Therefore, overall, cryptocurrencies are NOT like previous economic bubbles, such as one of the earlier examples, Tulip Mania.Global electronic monkey money frauds, backed by the threat of force from apes with weapons of mass destruction, have some of its relatively minor manifestations being the exponential growth of cryptocurrencies, within the context of the exponential growth of the mainstream electronic currencies. All of that tends towards becoming more and more of a Wonderland Matrix Bizarro World, where everything is publicly presented and perceived in the ways which are absurdly backward. Human beings living within Globalized Neolithic Civilization have been perfecting their abilities to lie to each other, which included being able to lie to themselves. The development of electronic "money" is one of the most important ways in which Civilization has become based on prodigious progress in physical sciences, WITHOUT any genuine progress in political science. Rather, all forms of electronic "money" are enabling the vicious feedback loops of collective social insanities, which are based on those forms of "money" ultimately being ENFORCED FRAUDS, whose corollaries are that THOSE are most socially successful by NOT admitting and addressing that those are ENFORCED FRAUDS.Various cryptocurrencies are like tiny bubbles attached to huge bubbles. Since the huge bubbles of the mainstream electronic "money" are being astonishingly inflated, so too, the tiny bubbles of alternative forms of electronic "money" are similarly being inflated. Due to that, almost everyone takes for granted perceiving those phenomena in ways which are based on excessive psychologizing, while the underlying environmental energy flows tend to be discounted and disregarded.When it comes to the "economics" associated with electronic "money," everything is based on taking for granted the DUALITIES of false fundamental dichotomies, and the related impossible ideals, (such as what money should be.) Actually, human beings and Civilization are manifestation of general energy systems, which therefore work through UNITARY MECHANISMS. However, when one perceives society through using such UNITARY MECHANISMS, it becomes painfully obvious that governments are necessarily the biggest forms of organized crime, dominated by the best organized gangsters, which are the banksters. Within that context, the various emergent alternative forms of electronic "money," or cryptocurrencies, are various alternative forms of organized crime, in the sense of that energy also being harnessed to achieve symbolic robberies, but still on much smaller scales.Various sorts of gross understatements are typically made regarding various economic bubbles. FOLLOW THE MONEY TO ITS SOURCE, which is the ability to enforce frauds. Since everything that human Civilization is doing through globalized electronic "money" is based on being able to become about exponentially more fraudulent, it is barely possible to exaggerate the excessive psychologizing of the ways that the social successfulness of symbolic robberies have become runaway vicious feedback loops of collective social psychoses, which phenomena are usually grossly understated by those who only engage in superficially correct analyses of the accumulating apparent anomalies.Any historical examples, such as Tulip Mania, or similarly those presented in the article above, were relatively tiny waves on the ocean of events of excessively successful control of human Civilization through the methods of organized crime, more and more manifesting as runway criminal insanities, which are spinning out of control. Since it is politically impossible to face the fundamental facts that MONEY IS MEASUREMENT BACKED BY MURDER, it is also politically impossible to publicly recognize in any significant ways how various forms of electronic "money" are actually manifesting within that overall context.At the present time, the Grand Canyon Chasms between prodigious progress in physical science, WITHOUT any matching progress in political science, are getting wider and WIDER. More and more fantastic special effects are being employed to repeat telling the same old stupid social stories, such as how electronic "money" is implemented through social pyramid systems, which necessarily developed as larger and larger manifestations of the applications of the principles and methods of organized crime. Indeed, automation is more and more becoming automated fraud, which issues tend to be not well understood, due to the progress enabling automation NOT being associated with any progress in the politics that surrounds those automation achievements. Therefore, the astounding progress in mathematical physics, such as exemplified by quantum mechanics, and all of the rest of the related developments of general energy systems, such as cybernetics, etc., still get primarily applied through mainstream electronic "money" systems, and now secondarily applied in similar ways through alternative forms of electronic "money."All of that is being done in ways which deliberately ignore and misunderstand how and why MONEY IS MEASUREMENT BACKED BY MURDER. Therefore, the various ways in which most people indulge in their excessive psychologizing of those phenomena include the ways that the mania bubbles now include the cryptocurrency mania bubbles. However, it will probably not be the case that the various cyptocurrencies bubbles would pop unless the larger mainstream electronic "money" bubbles that they were built on also were popping.As long as it is possible for the mainstream electronic "money" bubbles to be blown up and UP, by better enforcing bigger frauds, then the alternative electronic "money" bubbles will probably also be able to grow, since those are tiny parasites riding along top of those much larger parasites. For the foreseeable future of Civilization, there are most likely to be intensifying paradoxes driven by progress in physical science and technology WITHOUT any genuine progress in political science, because such genuine progress in political science would take even greater series of intellectual scientific revolutions and profound paradigm shifts than those which made the previous progress in physical science possible.All of the economic bubbles are based on ENFORCED FRAUDS ACHIEVING SYMBOLIC ROBBERIES, which includes the various cryptocurrency bubbles, such as the about exponential growth of the "US dollar" value of Bitcoins. The essential political economy problems are that the social successfulness of those SYMBOLIC ROBBERIES depends upon being able to publicly misrepresent THOSE. While it is necessarily the case that Civilization operates according to the methods of organized crime, in which context the murder systems are the most important, since those ultimately backed up currencies, the necessary corollaries of that social situation are the ways that economic bubbles are manias which are perceived in excessively psychologized ways, because the underlying environmental energy flows are deliberately ignored and misunderstood as much as possible, in order to facilitate the continuation of the runaway SYMBOLIC ROBBERIES achieved by electronic "money."Every day, in every way, contradictions, driven by about exponentially advancing physical technologies enabling political technologies to continue to maximize their maliciousness, get bigger and BIGGER.  The development of various forms of electronic "money" are some leading edges of those bubble blowing manias. Pretty well NONE of the ways of thinking which enabled prodigious progress in physical sciences are allowed to become publicly significant in political sciences. Rather, economics developed as class warfare, within the overall history of warfare. Since the long history of successful warfare was based on becoming as deceitful and treacherous as possible, successful finance was then built on the basis of being able to enforce frauds, which are publicly able to present themselves as NOT being fraudulent.Various schools of mainstream economics developed as intellectual mercenaries, within the context of the about exponential growth of the mainstream forms of electronic "money." In my opinion, the proponents of the various alternative forms of electronic "money" are similarly biased by their own interests. In general, almost everyone adapts to living INSIDE sociopolitical systems based on enforcing frauds, in ways that those who are the best adapted to taking advantage of those systems become the best available professional hypocrites. Thus, the bottom line continues to be that cryptocurrencies are tiny parasites riding on top of larger parasites, all of which combined are acting in ways which headed towards killing their hosts.

In reply to by mcbond

wmbz Thu, 11/23/2017 - 11:28 Permalink

~You ain't seen nothing yet~Folks calling for a crash in 2018 are in for, as with each passing year, a big disapointment!The money printers will never, ever give up without a huge fight, and they can go a long, long time.

Consuelo Thu, 11/23/2017 - 11:49 Permalink

  "Finally, after 30 years of rampant monetary expansion the central banks of the world have been forced to reverse direction and begin to normalize interest rates and balance sheets." It is becoming all too easy now to spot the kernel of candy korn in every one of Stockman's posts.   And unfortunately, it poisons what is otherwise very useful and factual information.This is simply calling the sky purple when it is blue...    David simply refuses to recognize that Reagan's era has passed, and with it any semblance of reality as pertains to markets.  Strangely, I think he knows this but lacks the ability to admit that the wheels have come off and there is no 'reckoning' back to stability.   There is only continuously Up or precipitously Down...  

Ron_Mexico Consuelo Thu, 11/23/2017 - 12:18 Permalink

what is tiresome is the endless repetition of this "where ignorance is bliss, 'tis folly to be wise" narrative.  Although this is certainly true for investing in the short run, the financially devastating hand of reality can be ignored only for so long before it returns to deal from a new deck:"Your black cards can make you money so you hide them when you're able In the land of milk and honey you must put them on the table."

In reply to by Consuelo

Let it Go Thu, 11/23/2017 - 11:57 Permalink

This bull market has gone on way to long. Time has a way of revealing certain realities but does so at its own choosing. The economy is far from a well-oiled and designed machine and in the end, we may find that it is not really completely under the control of those who have been placed in the driver's seat.In a world where central banks have become so deeply involved in manipulating and distorting markets we find true price discovery no longer exist. The question remains how best to prepare for a economic meltdown. Expect both luck and caution to play a big role on our individual fortunes as we move through the financially violent period before us. More on this subject below. http://The Catalyst Of Our Economic Demise has Yet To Be Determined .html

Professorlocknload Thu, 11/23/2017 - 12:26 Permalink

"Even then you would need 7% annual earnings growth to hold onto today's 24.2X PE multiple at the Goldman S&P 500 target."Oh, I would guess the Fed can manage 7% annual devaluation in that time frame, in order to make GS dream come true.

HRClinton Thu, 11/23/2017 - 12:27 Permalink

What a crock of shit emanates from the (((Fed)))!When you have fiat Debt currency, expansion is the ONLY thing you can do. It's in its (((DNA))), until all assets have been stolen by (((them))) and their (((Babylonian Money Magick))).I'm appalled at and disgusted by the fake ZH "libertarian", who talk out both sides of their mouths:On the one hand, they spew anti-Fed mantras, but then (on the next sentence or paragraph) they pine for their rent-seeking interest rates in their Savings accounts. The irony and hypocrisy is amazing.

alpha-protagonist Thu, 11/23/2017 - 12:31 Permalink

Here's what we know:a.) BTCs relative value will always be compared to the dollar, if for no other reason than the conceptual understanding the masses have of the dollarb.) the feds will stop at nothing to control the economic agenda...printing, crashing, or otherwise...whatever's in their best interests towards an agendac.) the relative freedoms a nation might enjoy, seem to go hand in hand with its economic independence (see 3rd world shitholes as examples)d.) those who wield power have tremendous egos and will usurp their positions for the inertia to remain in powere.) if economic events are now occurring that have never happened before, then by extension, it defines a "new normal"f.) all "pundits" talk their book for their own benefit...who to believe?Soooooo, knowing this and if bears capitulate, wouldn't markets rise simply because of psychological factors and of course, more $$$ being dumped into them? And if so, that plays right into the hands of the puppet masters who gain more power through more subscribers. What's the end game and is one missing out, or playing it safe by staying on the sidelines? And aren't we all just one piece of legislation away from insolvency, anyway?