Irrational Exuberance

I almost forgot that Monday marked the 15th anniversary of Alan Greenspan's Irrational Exuberance speech which suggested that stocks were overvalued.  Here's what he said in a speech before the American Enterprise Institute on 12.05.1996. 

....."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?..." 

      Source:  http://www.federalreserve.gov/boarddocs/speeches/1996/19961205.htm

Greenspan was right in the long run.  According to Greg Mankiw the return on the U.S. stock market has been 5.55 percent in that time period while the the return on the U.S. bond market has been 5.98 percent.  But he was wrong in his timing as stocks would continue to advance for almost 2 1/2 more years and advance a bit over 100% during that period.