Kass: Irrational Non-Exuberance?

This blog post originally appeared on RealMoney Silver on March 4 at 8:31 a.m. EST.

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?... We, as central bankers, need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs and price stability.

-- Alan Greenspan, "The Challenge of Central Banking in a Democratic Society," before the American Enterprise Institute at the Washington Hilton Hotel Dec. 5, 1996

Back in late 1996, Alan Greenspan uttered his most famous words during his tenure as Federal Reserve Chairman. (On page 176 of his 2007 autobiography, The Age of Turbulence: Adventures in a New World, Greenspan says, "The concept of irrational exuberance came to me in the bathtub one morning as I was writing a speech.")

Even though Greenspan's remarks were casually tossed out in the middle of a dinner speech, the stock markets around the world had a strong and negative reaction to his seemingly harmless question asked above. The U.S., Tokyo and Hong Kong markets dropped by 3%, and an even greater response occurred in the Frankfurt and London markets, which declined by over 4% each.

Though Greenspan never again uttered the phrase "irrational exuberance" in any public venue, those two colorful words became the most enduring and famous quotation during his lengthy position as the Chairman of the Federal Reserve, and they have since acquired a special meaning relating to the mind-set that occurs during speculative bubbles.

On Dec. 5, 1996, at the time of Greenspan's "Irrational Exuberance" speech, the Dow Jones Industrial Average stood at approximately 6,450, within 4% of the DJIA's 6,700 closing level last evening.

I am not unaware of the challenges and the current paralysis in the world's credit, economic and stock markets; I still see the Great Decession, something between a garden variety recession and The Great Depression.

I was at the forefront of warning investors about the weakening foundation and false hopes of growth in the pages of RealMoney Silver, in Barron's and on CNBC. Frankly, paying attention to those warnings would have successfully protected many investors from the irrational exuberance that most strategists and money managers had expressed in their bullishly tilted portfolios over the course of the past two years.