Irrational Exuberance!

“Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. 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?”- Alan Greenspan; December 5, 1996.

One of the longest-serving Fed Chair, Alan Greenspan, coined the term “Irrational Exuberance” in the run-up to the most significant stock market bubble in 2001, the “Dot-Com Bubble”.

The shock from the stock market crash in 2001 was so profound that the ensuing negative wealth effect caused a mild recession in the world’s largest economy.

Nevertheless, the 2001 recession was unique as the h…