Friday, 15 March 2013

"Greenspan: No Irrational Exuberance Here"

Christopher Westley writes today,
On Squawk Box:
Host: The question of the morning: Do you want to break out the phrase again, irrational exuberance? 
Greenspan: [Chuckling] No, I don’t think it’s quite appropriate in this type of environment. In fact the basic way of looking at this degree of exuberance or non-exuberance is to take a look at what we call the equity premium, as you know it’s the extent of the measure that stocks are overvalued or undervalued, and right now by historical calculations 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.
Must be that Fed Model he is referring to again. Yes, the spread between the earnings yield and long term treasury yields is high, but investors clearly do not believe the Federal Reserve manipulated low level of interest rates are going to remain this low forever. Based on 10-year average earnings yield, the stock market is not undervalued. It's actually expensive. Don't rely on Greenspan any more than you would rely on Benny "the Printer" Bernanke when it comes to stock market valuations.

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