— Market-roiling phrase from Federal Reserve Chairman Alan Greenspan, in a 1996 speech
Harken back to 1996 B.T. (before Twitter) and marvel at the speed at which a couple of potent words, buried in a rambling, heavy-on-history speech delivered by Federal Reserve Chairman Alan Greenspan on Dec. 5, 20 years ago today, made their mark on global financial markets in just a few hours.
Marvel further at how that pull-out phrase, “irrational exuberance,” has been imprinted in Wall Street lore, and in wider use, ever since. But remember this, too: It didn’t really work.
In shorthand, Greenspan was warning that stocks had gotten too hot. Here’s some of the context that surrounded the maybe-too-subtle alarm: “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? And how do we factor that assessment into monetary policy?”
Markets got the message, at least based on the knee-jerk reaction that sent stock futures and the dollar tumbling off-hours. But markets also felt empowered to ignore the powerful Fed head. If Greenspan intended, as he later admitted, to knock some wind out of stocks, his impact was not long-lasting. From there, stocks DJIA, -2.654% rallied for more than three years before the dot-com bubble finally burst in 2000.
REQUIEM FOR THE AMERICAN DREAM is the definitive discourse with Noam Chomsky, widely regarded as the most important intellectual alive, on the defining characteristic of our time – the deliberate concentration of wealth and power in the hands of a select few. Through interviews filmed over four years, Chomsky unpacks the principles that have brought us to the crossroads of historically unprecedented inequality – tracing a half-century of policies designed to favor the most wealthy at the expense of the majority – while also looking back on his own life of activism and political participation. Profoundly personal and thought provoking, Chomsky provides penetrating insight into what may well be the lasting legacy of our time – the death of the middle class and swan song of functioning democracy. A potent reminder that power ultimately rests in the hands of the governed, REQUIEM is required viewing for all who maintain hope in a shared stake in the future.
Brown University president Christina Paxson announced yesterday that the university has sold 90 percent of its investments in fossil fuels and is making plans to liquidate the remaining investments, which make up less than 1 percent of Brown’s portfolio. Brown joins a growing list of colleges looking to part ways with the fossil fuel industry amid increasing community pressure and new information on whether divesting harms returns.
Brown’s divestment is part of a universitywide climate plan to cut greenhouse gas emissions by 75 percent by 2025 and achieve net zero emissions no later than 2040.
A letter from Paxson announcing the changes, which includes details about sustainable central heating, new wind turbines and climate partnerships, is available in full on the university’s website.
The bears have been ascendant in the stock market lately. Some other Bears have also been victorious of late — in the Ivy League numbers game.
There are few more influential investors than the endowment funds of the Ivy League universities. Harvard and Yale have the world’s two largest endowments, at more than $30 billion each as of last June. All have the huge advantages that come with being able to bear illiquidity risk, and Yale’s move into hard-to-trade, buy-and-hold assets under David Swensen — which started some three decades ago now — continues to be hugely influential throughout the world of asset allocation. It has spurred investments into hedge funds, illiquid real assets such as forestry, and particularly private equity.
So it is disquieting that the Ivies had a bad year last year (they all have a financial year that ends on June 30), and that the source of the problem seems to be their illiquid assets. According to Markov Processes International, seven of the eight Ivies failed to match the returns of a simple 60/40 portfolio, that is weighted 60% in stocks and 40% in bonds. The only one to do better was Brown University (whose sports teams are nicknamed the Bears). Its $3.9 billion fund returned 12.4% in the period, compared with the 9.9% gain netted by 60/40 allocations.
Why, though? Both private equity and venture capital outperformed public equities and bonds during the 12 months ended last June. This is when it gets strange. As the chart shows, by Markov’s estimate, several of the eight Ivy endowments had huge allocations to both venture capital and private equity, led by Yale and Princeton. Brown’s allocation to them was in the middle of the pack. Hedge funds had a bad year, and Brown’s allocation to them was lower than some, but not by a lot:
Markov’s next step was to try to attribute how much each asset class contributed to performance. Basically, this can be done by taking the percentage allocation to an asset class, and multiplying it by the overall return for that asset class. If the total arrived at by this exercise differs from the actual return achieved by the endowment, the remainder can be explained by “selection” — essentially an asset allocator’s equivalent of “alpha.” The portion achieved by selection is the portion that shows the endowment managed to add or subtract value with its choices within asset classes. In the case of the Ivies, this analysis reveals the remarkable conclusion that Brown was the only one to add value to its endowment with its selection of investments last year. All the others — universally staffed by formidably intelligent people — made selections that lost value:
Welcome to Transition Studies. To prosper for very much longer on the changing Earth humankind will need to move beyond its current fossil-fueled civilization toward one that is sustained on recycled materials and renewable energy. This is not a trivial shift. It will require a major transition in all aspects of our lives.
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