The party is over on Wall Street.
That’s according to former Federal Reserve chairman Alan Greenspan who so famously warned about “irrational exuberance” in the stock market more than two decades ago.
Greenspan doesn’t see prices going any higher than they are now. “It would be very surprising to see it sort of stabilize here, and then take off,” Greenspan said in an interview with CNN on Tuesday.
He added that while there’s a possibility that markets could still go up further, he warned investors that such a rise would inevitably lead to an even more painful correction. So, “at the end of that run, run for cover,” he said.
“The volatility is a function of how we speak, think and feel – and it’s variable,” Greenspan said in the interview. “Unless you can somehow radically change human nature and how we respond, this is what you’ll always get and have been getting. You have to count on it, if you’re going to understand how the market functions.”
So far this month the markets have stumbled, spooking investors as mixed messages from the White House regarding trade negotiations with China have fueled the sell-off, as well as growing fears of a global economic slowdown.
Currently, both the Dow and the S&P 500 are poised to have their worst Decembers since 1931, when the country was in the throes of the Great Depression, with the Dow down 7% and the S&P 500 down 8% for the month thus far.
Greenspan, who was first appointed to the Fed by President Ronald Regan and was the longest-serving chairman as he remained in the seat into the George W. Bush administration, said that a key driving factor in “bringing the stock market down” has been the “pronounced rise in real long-term interest rates.”
He continued, “In fact, it accounts for all of the weakness recently, and I think it’s going to continue to account for it, because we’re in a period now where I think long-term rates are going to rise.”
But plunging stock markets and signs of slowing global growth may prompt the Fed to slow down its rate increases next year. While three to four rate increases had been projected for 2019, this week’s Fed meeting cut that projection to two hikes for next year.
Greenspan also believes that the U.S. may be heading into a period of stagflation, “a toxic mix” in which there is both inflation and a weakening economic backdrop, and that we’re not prepared for such a scenario. The last time the country was in a stagflation situation was in the 1970s and early 1980s.
“How long it lasts or how big it gets, it’s too soon to tell,” Greenspan said. “We’ll know it when we get on top of it.”
To be sure, critics now blame Greenspan for the 2008 financial crisis for his role in encouraging the housing bubble by keeping interest rates too low for too long and for failing to rein in the explosive growth of risky and fraudulent mortgage lending.
Greenspan wrote in a 2010 paper that he’d been “lulled into a sense of complacency,” and said in the CNN interview, “Leverage is a disaster for markets – and we try to avoid it, be we fail every time.”
He also clarified that a crisis can be triggered by an asset that is toxic, “There are always toxic assets, you just never know, which ones are viable. Right now… it’s hard to tell what the toxic asset is,” he said.