Sta Hungry Stay Foolish

Stay Hungry. Stay Foolish.

A blog by Leon Oudejans

Irrational exuberance

On 5 December 1996, Alan Greenspan (the then-Federal Reserve Board chairman) gave a speech (ie, The Challenge of Central Banking in a Democratic Society) at the American Enterprise Institute for Public Policy Research and stated the following:

“Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. 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?” Note: bold marking in quote by LO.

Excerpt of 1996 speech by Alan Greenspan

Today’s situation appears to mirror the dot-com bubble of the 1990s despite these 4 geopolitical factors:

  1. Warfare in Europe.
  2. New pandemic lockdowns in China.
  3. High inflation in the U.S. (including rising interest rates).
  4. End of globalization (eg, decoupling from Russia and China).

Ever since the Russian invasion of Ukraine, I’ve been waiting for a financial markets crash. Markets are crashing in China and in Russia but not in Europe or USA despite lots of turmoil (eg, FD, FD, FT, Fox, WSJ). Why?

Some initial explanations why financial markets are (still) not crashing:

  • the Russian invasion of Ukraine can be contained;
  • the Russian invasion of Ukraine will fail;
  • the Russian invasion will not go beyond Ukraine;
  • the Russian army will not escalate (eg, chemical);
  • 2022 Q1 financial results are not due until April;
  • financial markets use a wait-and-see approach;
  • financial markets have an increased risk appetite;
  • some or all of the above.

In my view, the 2022 Q1 financial results must be disappointing due to:

  1. asset impairments (or: write-offs) in Russia and/or Ukraine (eg, FT),
  2. a decline in turnover since 24 February 2022, and
  3. negative forex results (ie, Russian ruble to EUR/USD).

Moreover, the price/earnings (PE) ratio of shares has been sky high for a (very) long period. You would assume and expect that a full-scale war in Eastern Europe would make people reconsider future prospects.

These 3 factors are (entirely) predictable and yet these hardly have an impact on the financial markets.

So, what’s going on?

If rational explanations do not provide an explanation then perhaps irrational exuberance does.

What’s Going On (1971) by Marvin Gaye
artist, lyrics, video, Wiki-1, Wiki-2, Wiki-3

Note: all markings (bold, italic, underlining) by LO unless in quotes or stated otherwise.


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1 Comment

  1. Jamy

    Right now clearly it’s hard to predict the future. It’s like believing in anything you can’t control, define or predict.


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