“Bill Gross opens his latest monthly letter to PIMCO clients with a classic 1996 quote from then Federal Reserve Chairman Alan Greenspan: “But how do we know when irrational exuberance has unduly escalated asset values?”
Yale economist Robert Shiller later wrote a book titled “Irrational Exuberance” to describe the run-up in tech stocks write before the dotcom bubble burst.
So, with asset prices at multi-year highs, Gross tackles the issue of overpriced assets.
He references the recent work of economist Jeremy Stein who used “irrational exuberance” to question the run-up in the high yield, aka junk bond, market. Without getting into details, Stein ultimate concludes that he sees a “fairly significant pattern of reaching-for-yield behavior emerging in corporate credit.” In other words, the valuations may be a bit stretched.
Now, Gross doesn’t declare that the junk bond market is in a bubble. After all, the title of his letter is “Rational Temperance.” From his letter:
On a scale of 1-10 measuring asset price “irrationality”, we are probably at a 6 and moving in an upward direction….”
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