Last Friday former Fed chairman Alan Greenspan gave support that the 4-year bull market in stocks has room to run:
And right now, by historical calculation, we are significantly undervalued. The reason why the stock market has not been significantly higher is there are other factors compressing it lower. But irrational exuberance is the last term I would use to characterize what’s going on at the moment.
On March 4, Fed vice-chair Janet Yellen assured investors:
At this stage, there are some signs that investors are reaching for yield, but I do not now see pervasive evidence of trends such as rapid credit growth, a marked buildup in leverage, or significant asset bubbles that would clearly threaten financial stability.
And on February 26, chairman Ben Bernanke gave stocks his stamp of approval:
I don’t see much evidence of an equity bubble.
Not to question these all-knowing masters of the universe, but there does seem to be a trifle of evidence to the contrary, that perhaps their zero interest rate policy (ZIRP) has stampeded savers into anything hinting at a yield. Exhibit A: Over $1 trillion has poured into bond funds over the past 4 years (out of money market funds). Exhibits B and C: Junk bond yields are at record lows and margin debt near record highs. Exhibit D: Total credit market debt is a record $56.1 trillion (352% of GDP) compared to $49.8 trillion (also 352%) at the top of the credit bubble 5 1/2 years ago.
After the tech bubble burst, The Maestro admitted that when it came to detecting bubbles investors were on their own:
We at the Federal Reserve considered a number of issues related to asset bubbles–that is, surges in prices of assets to unsustainable levels. As events evolved, we recognized that, despite our suspicions, it was very difficult to definitively identify a bubble until after the fact–that is, when its bursting confirmed its existence. (August 30, 2002)
Five years later those words proved prescient (one of the few times) as the Fed-heads missed the housing bubble and failed to recognize how it had metastasized into a full-blown credit bubble. While still at the helm of the Fed, Greenspan weighed in on his 6-year experiment to contain the bursting tech bubble (which he failed to see coming):
Most of the negatives in housing are probably behind us. (October 26, 2006)
Right before the subprime bubble burst, Janet Yellen was oblivious to any impending trouble:
I’m waking up less at night than I was [over the slowdown in housing]. So far, there’s been remarkably little effect on the rest of the economy. (February 21, 2007)
After taking the reins at the Fed, Bernanke did his own Alfred E. Newman impersonation:
We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. (May 17, 2007)
The Federal Reserve’s crystal ball does not do asset bubbles. When its wizards begin to feel they possess such power (that is, denying the presence of a bubble), contrarians take notice.