Not to worry anyone, but the phrase “irrational exuberance” keeps cropping up conversations with investors. This is not normal, and not a great sign.
The famous term was apparently dreamt up in the bath by former Federal Reserve chair Alan Greenspan, and unleashed in a televised speech he delivered in 1996. At the time, the ill-fated dotcom bubble was in full swing, with the share price of dozens of untested, unprofitable tech companies soaring to the moon, often on the flimsiest of rationales.
“Lower risk premiums imply higher prices of stocks and other earning assets?.?.?.?,” Greenspan said on that fateful day. “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?” Markets dropped sharply in response to what was clearly, in retrospect, an early skirmish in the ugly market collapse in the following years.