You make money 364 days, and on the next day you go broke.
- Old Vol selling strategy line
The Central Bank "stability mandate" is starting to give people the willies. Bill Gross extols the virtues of picking up nickles in front of steamrollers at the Morningstar Conference. The IMF responds with a warning today. Basic market dis-function is apparent with the recent spate of 5 Year specials and creeping increase in "fails."
Jim Grant wrote a book on the subject in 1996 called The Trouble with Prosperity. On Dec 5 of that year, Greenspan gave the infamous "irrational exuberance" speech (wow even that needs a #GIK now):
Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. 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?