The term “Irrational Exuberance” is new as words go and was coined by FED Chairman Alan Greenspan in a speech on December 5, 1996. The speech titled “The Challenge of Central Banking in a Democratic Society” was delivered during the stock market runup as it approached the “Dot-Com” bubble. Irrational Exuberance exists when markets move in ways that underlying facts cannot support. This unfounded optimism always leads to corrections in asset prices, sometimes rapidly and painfully.
December 5, 1996, Concerns
When Alan Greenspan spoke, he was not in the middle of the Dot-Com Bubble but on the cusp of the run-up to the drop in March of 2000. He was looking ahead, not behind, because he had the benefit of historical boom-bust cycles to study. From railroads to radio and television, to biotechnology, to personal computing, to home computing, all cycles have a boom-bust period.
Greenspan saw a move in the markets where the traditional valuation methods were thrown out the window and replaced by foolish concepts like: “Profits no longer matter; it’s clicks that matter” was the day’s mantra. Their focus was on marketing and growth instead of profitability. Eventually, the young kids who had been given tens of millions of dollars to play with hit the brick wall of insolvency, and in 2000, the party ended. You cannot pay with clicks when the bills come due.
A few companies like Amazon and eBay adapted and survived. Investors, Venture Capitalists, and Wall Street had been duped into spending on technologies they little understood, but they wanted to be in on the ride. By 2002, the NASDAQ had dropped 78% from its peak.
In the lead-up to the bubble’s end, the FED lowered interest rates, and many believe it helped fuel the spending that triggered the collapse. Like all economic cycles, this one ended abruptly. The surviving technology companies became dominant over the next twenty years, but picking winners and losers was difficult. The FED believed it was easier to clean up the mess than to try and intervene during the rapid market climb. They, like investors, were enjoying the accolades and euphoria that came with the boom near the end of the cycle.
FED Meeting December 13, 2023
Twenty-seven years later, we need to catch our breath and try not to let history repeat itself. Following the FED Meeting on December 13, 2023, Chairman Powell held a press conference where he alluded to the FED’s possible position on interest rates in 2024. Looking for good news, any good news, the Wall Street crowd pronounced the moderation of inflation and quickly seized on the possibility of three interest rate cuts in 2024, and the markets took off. Entirely ignored by the press was his warning that they could also raise rates because this would not fit into the narrative of a “Santa Claus Rally.”
Cutting rates is probably a good thing now because we know we cannot pay the interest on the national debt, and it is growing at a rate of $1 trillion every ninety days. Freezing or lowering rates will calm the markets but only fractionally help our debt crisis. It will reduce the unrealized bond losses in our major banks and delay or reduce the likelihood of defaults. The FED has other tools to slow the economy, so lowering rates with moves like raising reserve requirements is possible. But for many consumers, the rate cuts are a negative, and we have a consumer-driven economy.
We need to get real and understand that nothing has happened yet, and the actions in the market seem to be another example of irrational exuberance. The quick upward movement in the stock and bond markets may be real, or they may quickly reverse if the anticipated rate cuts do not happen.
Rationality
Whether it is television, the Internet, or Dot-Com companies, our recent stock market hiccups have all been tied to Wall Street’s misunderstanding of new technologies. Today, that technology is Artificial Intelligence (AI). Any CEO worth his or her compensation package will explain how his or her company is on the leading edge in implementing all sorts of AI projects. Failing to mention AI indicates that your company is out of touch with the times.
Never mind that most CEOs can only spell AI without knowing its use or impact on their company or industry. The distance between concept, creation, implementation, and use is as vast as the Grand Canyon. AI remains a money drain for most companies and a money maker for consultants and technology sales for now. The coming corporate bodies on this battlefield are unknown.
The daily AI theatre is on shows like CNBC’s Squawk Box, FOX Business, Bloomberg, or Forbes, just as in the Dot-Com days. In the real world, real people must do real work to get from here to an AI-centric world.
Ignoring the Rest
Like everyone else, I have enjoyed seeing my retirement account increase slightly. It feels better than all the downward movements in recent years. But it also produces a queasy feeling in the pit of my stomach, like I have been here before.
When Wall Street hits an inflection point that creates irrational exuberance, it creates hype that ignores everything you need to see. Rates did not change last week, but that is the least of our issues. More importantly, geopolitical tensions did not change, and if those do not improve, then all the Wall Street theatre will produce more heartache. If these tensions do not change, the FED can do everything in its power and not win the battle.
The last time I checked, oh let us say fifteen minutes ago, there were at least these items to ponder when considering the FED’s ability to lower rates, win the war against inflation, and produce the elusive “soft landing” desired by Wall Street.
- Out-of-control Federal spending on social programs.
- Higher rates are needed to attract buyers for our debt internationally.
- Massive bond sales to China, Japan, and Russia have ended.
- The Israeli/Palestinian War support and funding.
- The War in Ukraine funding.
- Tensions between Taiwan and China.
- The border crisis and masses of unemployed migrants.
- Looming corporate real estate refinancing.
- Central Bank Digital Currencies across the world.
- A potential Cryptocurrency crisis.
- De-dollarization by many foreign nations.
- Moves away from the dollar and toward gold by central banks.
- The BRICS consortium and the end of the petrodollar.
All these issues directly or indirectly affect the FED’s ability to execute its mission, but apparently, Wall Street thinks them inconsequential. Another option is that Wall Street wants a temporary rally to liquidate their positions in areas of excessive risk.
The Irrational Exuberance Cycle
Irrational exuberance usually comes to an abrupt halt when the fantasy of Wall Street hits the reality of Main Street. That was how it ended in the Dot-Com era, and that is how it will end this time. The above items limit our ability to control our destiny. This time, it is not our willingness to act but our ability to act.
The FED is known for its ability to enter a war after the battles have been fought and then only to shoot the wounded on the financial battlefield. Why would we think anything has changed? We can hope for change, for a soft landing, and for a better 2024, but the jury is out, and only results will matter.
Resources Used in this Article
Dot-com bubble, Wikipedia.com, Last accessed December 16, 2023.
Irrational Exuberance: Definition, Origin, Example, by Adam Hayes, Investopedia, Investopedia.com, April 8, 2022.
What Grade Does the Fed Get for 2023?, by Roger W. Ferguson, Jr. The Wall Street Journal, wsj.com, December 14, 2023.
