The Week in Breakingviews

“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?” That was the question posed by Alan Greenspan, then chairman of the Federal Reserve, at a dinner in Washington in December 1996. Coming from a central banker whose utterances were often deliberately opaque, it was an unusually clear sign that the Fed was paying attention to rising share prices. Since then, many policymakers?have borrowed the two-word phrase to describe investors losing their heads.?

I thought of Greenspan this week as financial markets again showed signs of high spirits. The S&P 500 Index and Nasdaq Composite hit new records, while the Dow Jones Industrial Average – an absurd and archaic benchmark which?refuses to fade into obscurity – touched a big round number. Bitcoin seems to be in a self-inflating bubble. Oh, and meme stocks GameStop and AMC are once again bouncing around, courtesy of some guy tweeting a drawing of a person leaning forward.?

To see how surprising all this is, imagine going back to late 2021 and telling an investor that in less than three years the yield on 10-year U.S. government bonds would have trebled to around 4.5%, that Russia and Ukraine would be at war, that U.S. inflation would still be almost 3.5%, and that one of the largest cryptocurrency exchanges would have collapsed in a spectacular fraud. I doubt that investor would have foreseen today’s markets.?

It’s true that some previously bubbly assets have lost their fizz. Elon Musk’s Tesla, for long a stock market darling, is trading at half its 2021 peak. And Austria’s 100-year bond, a retrospective symbol of the era of ultra-low interest rates, now changes hands at?just half its original face value in 2020. Broader measures of financial conditions, while better than a year ago, are tighter than before the pandemic.?

Greenspan was sceptical that central bankers could accurately tell when buoyant investors had lost touch with reality. The latest gyrations suggest that the laws of financial gravity can take a long time to kick in. After all, when Greenspan issued his famous warning, the Nasdaq Composite was around 1,300. Less than three years later, in March 2000, the tech-focused index peaked at more than 5,000. The same month, the economist Robert Shiller published a book arguing that stock markets were overvalued. Its title: “Irrational Exuberance”.?

Five things I learned from Breakingviews this week:?

1. Of the nearly $4 trillion in new debt issued by emerging market governments last year, 95% was denominated in local currencies.?

1. Both McKinsey and Arthur Andersen were founded by accountants in Chicago.?

1. Eight times as many Japanese companies went bankrupt due to labour shortages in the second half of last year as a decade earlier.?

1. More than 85% of private credit loans are bigger than $1 billion.?

1. Fintech company Block earned 40% of its revenue from fees on purchases of Bitcoin.