By Randall W. Forsyth
April 19, 2021
To those of us of a certain age, it’s shocking that nearly a quarter-century has passed since Alan Greenspan uttered his now-infamous phrase “irrational exuberance.” Yet the former Federal Reserve head’s description of the dot-com mania seems inadequate to describe some of the wackiness going on these days.
The manic ebullience of some market aspects has spilled over into popular culture, observes Peter Atwater, an adjunct professor at William & Mary. In his Financial Insyghts, he catalogs a slew of examples, most prominently the cover of New York Magazine, which asks, “Can I SPAC My Stonks With NFTs?”
It makes me wish I could consult Paul Macrae Montgomery, a student of the markets who passed away too soon. Before behavioral economics was recognized in academe, he poked holes in the accepted orthodoxy that markets are rational, even though they’re made up of folks prone to all-too-human mood swings.
Perhaps most notably, Paul originated the magazine-cover indicator. He found that the cover stories of general-circulation periodicals, such as Time, captured a trend just weeks or months before it was about to reverse. The image of a bear on the front of one newsweekly marked almost the exact bottom of the 1973-74 bear market, while another bemoaning “interest rate anguish” came as rates were making their historic top in the early 1980s.
To Paul, the splashing of esoteric stuff like special purpose acquisition companies and nonfungible tokens, along with slang like “stonks,” on the cover of a nonfinancial magazine probably would indicate that these examples of excess might be cresting. Then again, Greenspan’s musings on irrational exuberance came while what turned out to be dot-com mania still had years to run, as it did beyond the turn of the century.
Beyond the circumstantial evidence of these cultural indicators, there are unmistakable signs of heady times. Chief among them: the stock market debut of Coinbase Global (ticker: COIN), the cryptocurrency exchange that commanded a market capitalization over $85 billion, dwarfing that of Nasdaq (NDAQ), where its direct listing took place on Wednesday.
At the other end of the spectrum, Greenlight Capital manager David Einhorn highlighted in his investor letter an obscure microcap, Hometown International (HWIN). As The Wall Street Journal reported, the company was valued at $100 million, even though its operation consisted of a single delicatessen in New Jersey with sales just over $35,000 during the past two years. This was part of a more serious critique by Einhorn about regulators’ failure to supervise what he calls “malfeasance” by corporate managements.
The real fodder for this lunacy is the abundance of cheap money, which has lifted the equity and speculative debt markets to unprecedented levels. On the latter score, Bank of America (BAC) credit strategist Oleg Melentyev thinks getting paid a mere 6.50% on a CCC junk credit with 14 times leverage indicates that the reach for yield has hit its limit.
At the other end of the credit spectrum, major banks took advantage of irresistible borrowing terms, bringing to market multibillion-dollar debt deals after reporting strong first-quarter earnings earlier in the week. Bank of America’s $15 billion offering set a record for a bank, topping the $13 billion by JPMorgan Chase ( JPM ) just a day earlier, at tight spreads over benchmark Treasuries.
“These markets are priced for perfection,” commented Cliff Noreen, head of global investment strategy at MassMutual. “We see very little value today in public equity or public corporate debt markets and continue to overweight private-market assets in equities, real estate debt and equity, and corporate loans and bonds.”
Meanwhile, the best we can hope for is a semblance of sanity. But as Chico Marx famously noted in A Night at the Opera, there is no sanity clause.
Write to Randall W. Forsyth at email@example.com