It is now more than two decades since Alan Greenspan, then chairman of the US Federal Reserve, coined the term “irrational exuberance”. Yet since then, and despite all the lessons of history, financial markets have repeatedly shown a gleeful willingness to convince themselves that their exuberance isn’t irrational. Look at the highs that were scaled at the turn of the millennium before the dotcom bubble burst. Look, too, at the way that markets exhibited a blithe disregard for risk as they cantered upwards before the financial crisis of 2008-2009 laid them low.
And now? Now, markets appear again to be gripped by exuberance. On both sides of the Atlantic, equity markets have touched new peaks in 2017. Prices of government bonds around the world have been pushed up so high that the yields they offer are vanishingly small or non-existent. As investors scour the financial landscape for something that offers a return of any magnitude, they have been prepared to turn a blind eye to the fragility of large classes of assets. All of this provides indisputable evidence of exuberance. The question is – to reprise Greenspan’s terminology - whether it’s irrational. Will it end in tears? Or, to use a further well-worn phrase, can we say that this time, it really is different?
This time, it is indeed different. But it is not different in the way that many would wish. Look at the monetary backdrop. Never before, have central banks’ interest rates been so low. Never before have those banks shown such readiness to buy financial assets in an attempt to inject cash into the system to stimulate consumption and investment: since the beginning of 2008, the Bank of England’s balance sheet has expanded more than four-fold; the US Federal Reserve’s has trebled in size.
And yet growth rates in developed economies remain anaemic. Despite the central banks’ best efforts, economies in the US, UK and Eurozone have, in recent years, expanded on average by far less than that 2%+ a year – a figure once considered normal. Nevertheless, this lacklustre growth rate has done nothing to dampen the appetite for equities. The rise in US stock market indices has largely been driven by the phenomenal performance of a handful of tech stocks. Amazon’s shares have nudged above US$1,000 (£758) this year, a five-fold increase since 2011. That success, however, is tempered by the near 30% of S&P Index constituents dipping by 20% or more from their highs.