I wouldnt classify the last twenty years as an age of turbulence. I would reserve such a description for a world with persistent pandemics. In terms of the investment markets, if Mr. Greenspan believes in such a description for the market environment then I dont see why the average non-professional investor should risk his capital in a market environment that is unfavorable to the way the average investor places his or her bet – invests. What youll learn from the book is that Mr. Greenspan believed paying down the national debt was the top priority when the government had a surplus, but he was outfoxed politically by the Bush Jr. team. The other thing youll learn related to the recent economic climate is that Mr. Greenspan believes that economic conditions had built up to a point, historically, where if the market hadnt been susceptible to subprime default, it would have experienced another crisis of similar magnitude. Regarding the future of the U.S. stock market, lets review how the market is composed of value perception and intellectual property. The DJIA was at 3,200 in 1993 Greenspans comments regarding irrational exuberance were made in 1996 as the DJIA reached 6,500. So, in Greenspans view, even when times were good they werent that good! If I consider the outlook of the stock market from this point I would review from the book:
The Presidents Council of Economic Advisors in early 2006 cited output by industries Highly dependent on patent and copyright protection, such as pharmaceuticals, information technology, software, and communications, as according for almost a fifth of U.S. economic activity in 2003. The council also estimated that a third of market value of publicly traded U.S. corporations in September 2005 ($15 trillion) was attributed to intellectual property; of that third, software and other copyright-protected material represented nearly two-fifths, patents a third, and trade secrets the remainder. It is almost certainly the case that intellectual propertys share of stock-market value is much larger than its share of economic activity. Industries with disproportionately large shares of intellectual property are also the most rapid growing industries in the U.S. economy.
Most of this value built up cannot be identified in a tangible form it exists in the minds of consumers, my belief is that as emerging economies learn to play the brand management game as well as the U.S. has, a shift will begin to take place, and values could evaporate in the U.S. stock market as foreign companies become more adept at serving their own consumer markets. As other nations learn the art of compelling storytelling, and manufacture their own kind of Hollywood, they will begin to create and own their own significant intellectual property that serves their markets better. So while there may be great consternation regarding the economic climate due to the subprime crisis, what has changed investors in the 1920s gambled on the stock market on margin and investors/institutions over the past several years gambled on securitized-subprime mortgages.
Mr. Greenspan has stated: The fundamental problem had been the underpricing of risk worldwide, an anomaly that built slowly to near-historic levels over the preceding few years. Equity premiums-the added returns that investors expect on stocks over the yields of risk-free investments like U.S. treasuries-had also contracted significantly. In their quest for slightly greater returns, investors had come to accept very much greater risk.
I would describe it as, even if investors werent reaching for a little extra return in unfavorable market conditions (post stock market bubble), the risk the small stock market investor faces is that he hopes for great wealth to be produced from his small sum, and it is almost as difficult to achieve this as it is for him to win the lottery.