The phenomenon of asset bubbles and irrational investor behavior upsets central bankers because they like to believe that markets move in accordance with their rational academic theories and hence that central planning can direct and control investor behavior and capital allocation. They have great confidence in their powers to “orchestrate” the economy. Unfortunately, that has never been reality.
Now 87 and still writing and speaking to try and repair his much tarnished image as the “magic maestro” who aided and abetted asset bubbles through lax policies devoted to increasing reckless leverage, Alan Greenspan sees things a little differently after the fall–a common human response. Unfortunately, Bernanke and Yellen and company, all who served under Greenspan, remain willfully blind to this day. Here is Greenspan:
“Fear and euphoria are dominant forces, and fear is many multiples the size of euphoria. Bubbles go up very slowly as euphoria builds. Then fear hits, and it comes down very sharply. When I started to look at that, I was sort of intellectually shocked. Contagion is the critical phenomenon which causes the thing to fall apart.”
And here is the revelation he has only come to after retiring from the Fed:
“A necessary condition that they happen is that the vast majority of people are bullish and committed and have no more purchasing power to buy stocks for example, that’s a sure sign that while everyone thinks the future is terrific it wont be.”
(AL this was shocking to you? You could have read this in dozens of books and papers that many people have written about this phenomenon over the last 100 years if you were interested in being wise.)
He goes on to say he is concerned this has been happening in the bond market of late. (Not in the stock market though of course….the stock market is only described as irrational in retrospect after it collapses. No one can ever see that coming according to bankers, brokers and the investment sales machine…)
All of this leads the maestro to exclaim that “the system is broken”. A point made beautifully this morning, where the 3rd consecutive monthly miss on private payrolls in the US jobs report for September has sent the already 40% over-valued S&P to an even higher high on the dismal news. CNBC sums it perfectly in this headline: Stocks rally on Fed optimism after tepid jobs report; S&P tops 1750 for first time
Maybe Marc Faber is right, maybe the Fed will start buying a trillion a month in US securities in an effort to keep stocks going up at literally every cost.