Irrational Exuberance

Here is a very interesting story about "irrational exuberance" (a term coined by a former Federal Reserve Bank Chairman, Alan Greenspan describing what he considered to be a hyper-inflated stock market) that may be once again rearing its ugly head in American ... see: CNBC Story. Basically, what this analysis by Yale Nobel-prize winning economics professor Robert Schiller suggests is that one key measure ... cyclically adjusted price earnings ratio (CAPE), may be flashing warnings of an impeding major stock market correction ... just like it did in 1929, 2000 and 2008.

From the above chart we can visualize that the CAPE index is moving into dangerous territory which surely suggest future problems for stock investors. However, as we can see in 1929 and 2000, the index can, as often happens, move far above the danger point before things actually correct. So, before you sell all your equities, may I posit that this index may get even further out of bounds before the bottom drops out.

So, if you like to gamble, you might wait until this index gets even more extended in the coming year. And, when the man shining your shoes asks for a market tip, then it might be time to head for the hills. If you are risk averse, you might start paring back or hedging your bets now.

Afterward: Greenspan made this comment in 1996 ... the market didn't crash with the dot-com bubble until four years later ...