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
Chairman. (On page 176 of his 2007 autobiography,
, 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
. 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.
By contrast, today the world economy and its markets are experiencing a profound degree of pessimism and seem to reflect an almost polar opposite set of sentiment and valuation conditions than what Greenspan thought existed over 12 years ago. And many of the same optimists with whom I debated in 2006 and 2007 now see no end in sight to the economic and market downturn; they are the new Cassandras.
Putting aside sentiment and valuation, however, one could begin to argue that we are now seeing irrational non-exuberance, considering (among other things) the accumulated build-up in retained capital and the aggregate world economic growth, which was stimulated in part by emerging regional economies, in the interim interval.
And within the outgrowth of that pessimism, opportunity lies.
In a recent
, I highlighted a checklist and a number of conditions that could contribute to a more sanguine economic and market outlook. I see both the answers to my checklist and to the set of conditions enumerated as likely to be materially moving toward a more positive direction in the months ahead as massive policy initiatives begin to have a salutary effect.
And on Monday night's "
" followed by yesterday's
, I documented additional reasons why I believe that the market may trace out a 2009 bottom out this week and why a rally is ahead.
Considering the current level of compressed stock prices, it should be noted that a positive reallocation of capital away from fixed income and into the equity market by investors (particularly of a pension kind) could hold the promise for a surprisingly sharp move higher and then possibly some base-building for further gains later on in the year.
Considering the backdrop of horrible fundamental news, many think my bottom call is, well, laughable. For example, I was comforted by the results of yesterday's
, which provided investors' opinions to my more upbeat view and resulted in a large percentage of the respondents disagreeing with me. As well, the blogosphere is almost in complete unanimity that my bottom call is absurd. Maybe that's another good sign!
In summary, my market bottom expectation is not a capricious call; I have given this a lot of thought, and I have hopefully documented the basis for my renewed optimism in the articles above.
It is now time to be greedy when others are fearful and irrationally non-exuberant.
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At the time of publication, Kass and/or his funds had no positions in the stocks mentioned, although holdings can change at any time.
Doug Kass is founder and president of Seabreeze Partners Management, Inc., and the general partner and investment manager of Seabreeze Partners Short LP and Seabreeze Partners Long/Short LP.