Anatomy Of A Bubble (Part 2)

“Stock market bubbles don’t grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception.”-George Soros

Dot Com Bubble

“Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets . . . 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 5th, 1996

Alan Greenspan was appointed the Fed Chair in 1987 when the Funds Rate was 6.73%, and inflation was around 3%. The inflation peaked in 1990 at 6%, and when he made the “famous” speech in 1996, inflation had been on a downward trajectory for the last six years. On 1st August 1990, NASDAQ was 329, and by the time Mr Greenspan introduced the word “Irrational Exuberance” to the world, NASDAQ had rallied to 1400 in Jan 1997; a whooping 4.3X in just six…