Every economic cycle exhibiting unsubstantiated optimism deserves its own euphemism for calm the fuck down—a evocative, but subtle phrase implying that investors may want to check themselves before they wreck themselves.
In 1996, Alan Greenspan, then the chairman of the Federal Reserve Board, coined the term "irrational exuberance." In testimony before Congress yesterday, current Federal Reserve chair Janet Yellen introduced the expression "substantially stretched" to refer to the value assigned to social media startups.
Nevertheless, valuation metrics in some sectors do appear substantially stretched—particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year. Moreover, implied volatility for the overall S&P 500 index, as calculated from option prices, has declined in recent months to low levels last recorded in the mid-1990s and mid-2000s, reflecting improved market sentiment and, perhaps, the influence of "reach for yield" behavior by some investors.
Speaking before the Senate Banking Committee, Yellen tried to justify the idea of keeping interest rates low. ("Cheap money" and low interest rates are part of the reason venture capitalists are able to assign such seemingly arbitrary values to startups, as investors seek out "riskier assets" for higher rewards.)
According to the Wall Street Journal, Republicans asked Yellen to explain why low interest rate policies wouldn't stoke "new financial bubbles," beyond just the provincial tech campuses of Silicon Valley:
"Rather than have a policy that causes bubbles, why wouldn't we have a policy that doesn't cause that?" asked Sen. Tom Coburn, (R., Okla.).
"The reason we have low interest rates is to deal with a very real problem, namely the economy is operating significantly short of its potential," Ms. Yellen responded. "Employment is suppressed well below its maximum sustainable level and inflation is running below our objectives. That's why we are holding interest rates low."
Despite advocating for policies in their best financial interests, venture capitalists weren't happy that Yellen called their valuations fat. But Business Insider's definition of witty also, apparently, has some stretch marks.
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