Nancy, re:Greenspan and risk/equity premiums
Indeed, AG is rambling -- of course, to avoid blame for any meltdown.
However, reading between the lines:
Things are so ridiculously overvalued that ya gotta look 2-3 decades out to justify P/E's -- under optimal conditions. So take off the rose-coloured glasses and evaluate equities as you would any other 'future.'
[For convenience, here's the requote.]
The second consideration with respect to how high asset values can rise is:
How far can risk and equity premiums fall? A key factor is that price inflation has receded to quite low levels. The rising level of confidence in recent years concerning future outcomes has doubtless been related to the fall in the rate of inflation that has, of course, also been a critical factor in the fall in interest rates and, importantly, the fall in equity premiums as well. Presumably, the onset of deflation, should it occur, would increase uncertainty as much as a reemergence of inflation concerns. Thus, arguably, at near price stability, perceived risk from business-cycle developments would be at its lowest, and one must presume that would be the case for equity premiums as well. In any event, there is a limit on how far investors can rationally favorably discount the future and therefore how low equity premiums can go. Current claims on a source of income available 20 or 30 years in the future still have current value. But should claims on the hereafter?
JMO, but 'irrational exuberance' sounds less threatening -- ESPECIALLY when in context with warnings of global economic impact. (Sounds like, "Only under the most optimal conditions could you even hope for a favorable outcome over such a vast interval; and -- oh, by the way -- things are already sub-optimal.")
Maybe I'm being liberal in interpretation? |
