"Of all the contrivances for cheating the
laboring classes of mankind, none has been more effective than that which
deludes them with paper money." ─ Daniel Webster
It was 1996. Alan Greenspan, the architect of the largest financial
house of cards in history, remarked that the markets might be experiencing a
whiff of “irrational exuberance.” His observation caused a minor crash in those
markets at the time, but the exuberance continued until reaching a dizzy height
in January of 2000. From there the bloom came off the rose for a few years.
Hope and Fear took a few rounds from Greed and Glory.
For a few years you could find a pessimist on Wall Street if
you looked hard enough. But as we arrive at the ten year anniversary of Mr.
Greenspan’s fateful remarks the punch bowl has been refilled to overflowing
with paper hooch and “irrational exuberance” is back stronger than ever.
Unanimous thinking makes contrarian curmudgeons like this
writer nervous. And I can’t recall a time when sentiment was as uniformly rosy
as it is now, not even when the party was roaring in 1999.
Ten out of ten Wall
“gurus” interviewed by USA Today for its big New Year’s spread headlined “UP UP UP”
predicted the market would go higher in 2007. Not a bear in the bunch.
The Wall Street
Journal went so far as to suggest in a headline, “ ‘Irrational Exuberance’
May Now Be More Rational.” At what level of insanity does irrationality
suddenly become the soul of reason?
Newsweek was giddy
at the prospect of “a world awash in cash.” “Let the Good Times Roll” was the
headline. The editors expressed an unshakable faith in regulators, central
bankers and markets for paper assets to lead the world from expansion to
I ask myself, upon what is the unanimous vision of exploding
prosperity based? Could it be our wonderful productivity? I haven’t seen a new factory built in my
lifetime. Or the efficiency of the digital age? I’d like to have a dollar back
for every hour I’ve wasted on a computer. What is it that is making us so
The answer flits like a garden butterfly, crinkles like
Santa’s smile, riffles and flops in solid packs and banded sheaves. Our
“irrational exuberance” is floating on an ocean of paper. A vast and mighty sea
of paper promises to redeem other paper promises with more promises still. And
every promise leads back to the primal promise made by the Federal Reserve and
its still popular tokens, known as dollars, which are finally promises to pay
nothing at all.
The world’s appetite for paper has never been greater. Paper
assets represent a higher portion of Gross Domestic Product than they ever have
in history. In the last thirty years the paper assets held on Wall Street have
exploded from under two percent of GDP to over 20%.
Hedge funds have created mirrors-on-the-wall financial fun
houses where they have never been seen before. Smoke rises from a smoldering
pile of exotic derivatives. Market wiz kids fan it into the fun house. Stocks,
commodities, real estate and now finally Wall Street financial firms themselves
have become objects of leveraged speculation driving irrationality from market
to market like a bee wandering through a meadow full of daisies.
Professional contrarian, Robert Prechter, pointed out recently
that the riskiest speculations have been completely democratized by the “For
Dummies” series of how-to-do-it books. Dummies can now become experts on a
variety of high risk investments such as Exchange-Traded Funds, Commodities,
Hedge Funds, and a little past the peak, House Flipping.
In this love affair with paper the old Wall Street saw keeps
coming to mind, “When everybody is thinking the same, nobody is thinking.” The
wisdom of such observations springs from an older and more experienced
collective consciousness. It’s a wisdom that grew out of the ashes of lost
fortunes and shattered dreams.
The voice of “irrational exuberance” is one that we hear at
manic tops, when the blood is running hot and the world is at our feet. It
shouts down the old wisdom. It hollers “UP UP UP” and whispers, “This time it’s