Correct take: Exuberance about retail (AP) leaves out that consumers are borrowing big to finance it

Irrational Exuberance In Producer Prices Coincided With Housing Bubble

Once producer prices hit the 122 level on the index in 1999, they really didn't look back for nine years, reaching a peak of 205 in 2008, a rise of 68 percent, pretty much tracking the housing bubble.

The dramatic reflation of the PPI since the recent nadir around 169 in 2009 has not been accompanied by a reflation of housing prices, try as the Fed may.

"With the exception of a few thoughtful men, the whole nation again sang paeans." -- Andrew White, Inflation in France (quoted here)

Listen To The Hand, Listen To The Dot: Irrational Exuberance Was First Noted There, Then

Spikes In European Irrational Stock Market Exuberance Visualized From The Mid-1990s

Case Shiller Home Price Index Falls To 128.13 Through 12/31/11

And everyone's happy for some reason.

When you consider that the mean for the whole history of the index is 123 and the median 120, which include the irrational exuberance of recent history, today's new low of 128 after this massive, outlier, bubble merely looks like more progress in the direction of regression toward the mean, not a "bottom" as many are saying. Indeed, the historical mean implies we have a fair way DOWN to go in price, to say nothing of the very real possibility of overshooting that to the downside.

The quarterly index, adjusted for inflation, has now hit today's level eight times in the post-war period:

Dec. 31, 2011 128.13

Mar. 31, 1999 128.40

Dec. 31, 1990 128.27

Dec. 31, 1979 128.78

Sep. 30, 1978 128.22

Dec. 31, 1955 128.21

Mar. 31, 1955 128.15

Dec. 31, 1954 128.30.

There's enough history between 110 and 130 to suggest that "normal" is still somewhere south of 128.

Take two aspirin every morning and call me in ten years.

Go here for the chart.

Irrational Exuberance in Corporate Debt Reaches $7.8 Trillion v. $1.2 Trillion in Cash

"I would go a hundred percent equities if I thought that we had reached a point when equity values made sense."

"People always say stocks are cheap, stocks are cheap. They're trading 10 times forward PE, 12 times PE. The problem is, I don't know the E[arnings]."

"What if the U.S. had a balanced budget? What would GDP be? Then what would earnings be? The U.S. cannot in perpetuity run a $1.3 trillion annual deficit. I don't believe in any of the earnings numbers."

"You basically have 30 years of accumulated debt that funds consumption and that has to unwind. And as it unwinds, it's going to have implications on economic activity and it's impossible that it won't ultimately find its way back to U.S. companies."

--Andre Kovensky, Managing Director of bond and real estate investment firm, Octavia Investment, quoted here.

Stocks presently are relatively expensive when measured by the Shiller p/e, which this morning stands at 21.21, almost 34 percent elevated from the median level of 15.84 going back to 1881. Investors might want to consider that the Shiller median level itself incorporates earnings from past decades when increased borrowing by both business and government might make the metric somewhat artificially elevated anyway.

The assertion that debt "has to unwind", however, is evidenced in the post-war period by the corporate data set only in the early 1990s when aggregate quarterly debt dropped briefly by 2 percent, and in the decline just concluded when it dropped briefly by 3.5 percent or just $256 billion.

Total corporate assets, by way of contrast, have reached an all time high of nearly $30 trillion.

One wag notes that Kovensky is just talking his book.

Bonds remain at nose-bleed prices, as do all assets.   

Irrational Exuberance in French Real Estate, as in USA, Began in Late 1990s

And a long, steady slide back down is in the cards.

So Ambrose Evans-Pritchard in the UK Telegraph, here:

The price-income ratio was stable from the 1960s to the late 1990s, before exploding over the past 12 years as a perfect storm of demographics, state sweetners and cheap credit led to a 12-year blow-off.

There are parallels with Spain and America but Mr Sabatier said the French twist is a replay of the early 1930s when investors fled stocks after 1929 and rotated into "safe" property. Hence the paradox of rising prices during the Depression. The strange boom did not end until premier Pierre Laval cut rent ceilings in 1935, triggering a long slide.

"Laval's policy change was the catalyst. The same could happen now as austerity forces brutal measures," he said. An array of market props are eroding, including tax relief on some mortages and certain capital gains. ...

A housing slump would hammer the economy just as long-delayed austerity begins in earnest. Property makes up 65pc of French household wealth, compared with 57pc in Germany, 39pc in Japan and 27pc in the US.

Irrational Exuberance in Home Ownership Rates

MJ Perry has a good post on the deflating home ownership bubble here, and this cool chart, which shows once again that starting in 1995 all manner of metrics assumed an irrationally exuberant upward trend.

An additional chart at the link less convincingly makes the case that low down payment loans were a cause, rather than a by-product, of the bubble.  Looks like a lagging indicator to me, but obviously it is an imprudent policy to require only 3 percent down.

Two Episodes of Nearly Vertical Exuberance in Net Worth

Two recent episodes of nearly vertical exuberance are shown by dramatic spurts in total net worth of households over 5 year periods: beginning from the mid-1990s and from about early 2003, coincident with stock market and housing bubbles.

A correction to trend implies a net worth decline to around $45 trillion, or 21 percent from the present $57 trillion.

Irrational Exuberance In Credit Creation Has Stalled

Yet one more metric showing how a new trend line began in the mid-1990s coincident with dramatic new housing and banking legislation of the time. A reversion to the status quo ante implies an overall reduction in asset values of at least 33 percent to 42 percent, and perhaps more in a crash which over-corrects below the more modest trendline set by bank credit of approximately $5.5 trillion.

Laughs at Fed Meetings Peaked With Housing Bubble in 2006

So says The Daily Stag Hunt here, where the data show that laughs suddenly surged in 2006.

Compared with the average of 20 laughs per meeting in the previous six years, laughs in 2006 bubbled up to an average of nearly 44, an increase of 115 percent.

Call it "irrational exuberance."

The meeting with the fewest laughs? October 1, 2001, with just 7 recorded laughs during the Federal Open Market Committee meeting.

Pablo Triana Says "Value at Risk" Model Permitted Leverage Up to 1000 to 1

Pablo Triana dates the adoption of the Value at Risk model, internationally, right at the onset of American irrational exuberance after 1994:

Before VaR, which was enshrined into law by international banking regulators around 1996 and finally adopted by the SEC in 2004, the capital charges on toxic trading stuff would have been way less economical for traders, effectively making it unaffordable for banks to bet the entire farm on such dangerous punts. Without VaR, monstrous leverage on balance sheets inundated with high-stakes punts would not have been possible. Many job losses would have been avoided.

Actual capital ratios were so infinitesimal because the model allows debt to take the place of equity.

More here.

Irrational Exuberance in Stocks and in Home Ownership Coincided Beginning After 1994

S&P 500 Close at 1155, 26 Percent Off the October 2007 High

For technical analysts, such a datum signifies that we are in a long term bear market since at least 2007 because the decline persists below 20 percent.

Today the Shiller p/e ratio is 19.79, shown here:

314 percent higher than the all-time low in 1920;

25 percent higher than the median;

20.5 percent higher than the mean;

and 55 percent lower than the all-time high in 1999 -- when a child was born somewhere, to mark that occasion, I am sure. Think of that: To be born at the height of irrational exuberance. I know such a person, but I didn't know the fact at the time.

A crash in the p/e ratio from here to the historical nadir would mean a collapse of nearly 76 percent.

Unthinkable? No. It is not necessary for such a crash to occur from a great height in the p/e ratio.

The collapse to the nadir in 1920 was from a p/e ratio lower than 25, as was nearly the case also in the early 1980s.

Price, and condition, that's all that matters, says the realtor. So should we all say. 

I Don't Like Felix Salmon's Chart. I Like My Chart.

His chart here makes it look like what's been going on since 1995 has been part of one relentless long term uptrend, the sanguine implication of which is that we should stop worrying if we are long term investors:

My chart shows that since the beginning of 1995 the trend supercharged into what people call, for lack of a better description, irrational exuberance, so named by Alan Greenspan himself at the end of 1996, whose own Federal Reserve management arguably makes him the very author of it:

You'd entirely miss that from Felix's chart.

There is no reason why stocks should be down today, as Felix says, except that from the long term perspective an S and P 500 index in the vicinity of 800 looks like a more fair valuation than 1200. The market has twice tried to tell us that, in 2002-2003 at the 775 level, and again in 2008-2009 at the 675 level.

It may be getting ready to tell us something similar again.

What say 575?

Rolling Irrational Exuberance . . . in Pictures

in housing from 1997

in the fed funds rate from 1990

in stocks from 1994

in oil from 2003

in gold from 2005

The Keynesian Moment: "Markets Can Stay Irrational Far Longer Than You Can Stay Solvent"

Very thoughtful and wise words of warning today, making sense of the nonsense, from Barry Ritholtz over at The Big Picture. For the original as it appeared go here.

What Does the Economy Have to Do with the Market?

Posted By Barry Ritholtz On October 6, 2009 @ 7:33 am

“There’s a lot of risk going ahead of some big bumps. There’s a very big risk that markets have been irrationally exuberant.”

-Nobel Prize-winning economist Joseph Stiglitz

Far be it from me to challenge the 2001 economics Nobel prize winner, but sometimes, indeed, quite often, markets decouple from the economic fundamentals.

I can show you many eras in history when the economy was awful, and nonetheless markets rallied strongly.

There have also been times when earnings did not matter, and profitability was irrelevant. There are times when animal spirits run the show, when irrational exuberance was in charge.

Such is the result of giving two million primates lots of money and keyboards and a belief they can make a living based on numbers and letters moving around — on a screen, in a futures pit, on an exchange floor, or even under a buttonwood tree.

Most mainstream economists — with notable exceptions like John Maynard Keynes, Richard Thaler, and Robert Shiller — have traditionally paid little attention to this reality. To a trader or investor, rationality matters far less than what the tape was doing.

Indeed, prices matter a great deal more to traders than theories or annoying things like “Objective Reality." To a trader, prices ARE the objective reality; to them economic theorists are peripheral players trying to rationalize reality.

I believe you can describe and explain what the market is doing, but in doing so, we must acknowledge Keynes' terribly accurate observation that “Markets can stay irrational far longer than you can stay solvent.”

I’ll have more on this later in the week . . .