Janet Yellen, last week released a biannual policy report just as Yellen, the Fed’s chair, began testifying to Congress on the state of the U.S. economic recovery, the outlook for inflation and what’s happening in financial markets these days.
What Yellen had to say on the last of those factors sent many folks into a tizzy. The Fed views valuations in some parts of the market — especially for smaller social media companies and biotech stocks — as being “substantially stretched,” even after a “notable downturn in equity prices for such firms early in the year.”
In other words, in spite of all of Yellen’s reassuring words to the contrary in recent months, there may be some kind of asset bubble taking shape in at least some corners of the financial market.
The last time that a Fed chairman stuck his head out like this was way back in December 1996, and it ended badly — very badly — for all concerned. Alan Greenspan was Fed head at the time, and his questioning about our inability to know when “irrational exuberance” inflated asset values to levels beyond which they could be sustained by fundamentals triggered a prompt and panicky selloff in stocks. Within months, however, the Dow Jones Industrial Average was setting a string of new records and Greenspan was left with egg on his face.
Greenspan wasn’t wrong, of course. The kind of “unexpected and prolonged contractions” he envisaged in his 1996 speech did show up — but not until early 2000, by which time the Dow had climbed 81 percent. Anyone who had listened to his warnings had forfeited a lot of money.
Burned by that experience, Greenspan never again spoke out to warn the public about bubbles taking shape in the economy or financial markets during his tenure at the Fed.
Read More at: http://www.thefiscaltimes.com/Columns/2014/07/21/Don-t-Ignore-Janet-Yellen-s-Stock-Market-Warnings
