Alan Greenspan: "Stocks Are Very Cheap."

Former Federal Reserve Chairman Alan Greenspan went from enjoying fawning adulation and a reputation as "the best central banker to ever live" to being named one of the 25 people most responsible for the financial crisis.

Take his advice as you wish.

Here, though, is what Greenspan told Bloomberg about U.S. stocks yesterday:

Well, stocks are very cheap. All you have to do is look at the equity premium. The best estimate of the equity premium, as best as I can judge, is JPMorgan's. And that's at the highest level in 50 years. And that essentially means that, with earnings still moving up -- as they have until very recently -- when you run up against a very high equity premium ... there is no place for earnings to grow except into stock prices.

And the point that I've been making recently is that I think we are underestimating the extent of equity stimulus, as distinct from fiscal stimulus, in driving this economy. ...

We don't recognize how important the equity markets are in a market economy. We lost, globally during the crash, $35 trillion in listed corporation value. And equity is the collateral of the financial system. It's not only the equity amounts, but it's also the fact that where equity prices are essentially tells the bondholder how much buffer there is between what he holds and bankruptcy. The bigger the market value increase in equity, the greater the quality, other things equal, of what bonds are.

You can see the rest of the video here.

The "equity premium" he speaks of is the excess returns stocks provide over risk-free assets like Treasuries. That premium is huge right now because interest rates are at historic lows. Even with the dividend payout ratio near an all-time low, the S&P 500 (INDEX: ^GSPC  ) yields more than 10-year Treasury bonds. That almost never happens. And when it does, it's typically a good sign for stocks -- especially relative to bonds or cash.

There are plenty of counterarguments here, namely that just because stocks look cheap relative to bonds doesn't mean they'll offer good returns. Treasury bonds are almost certainly offering negative returns once inflation is factored in. Stocks may produce more than that, but it might not be anything to write home about.

Some stocks look much better than others, of course. A couple that still look good to me include large caps such as Berkshire Hathaway (NYSE: BRK-B  ) -- trading near historic low price-to-book value -- and Procter & Gamble (NYSE: PG  ) , which fell hard last week. Small caps crushed large-cap stocks over the last decade. There's a good chance it will be the other way around over the coming decade.

For a few other ideas, check out the Motley Fool's special report, "Secure Your Future with 9 Rock-Solid Dividend Stocks." It's free -- just click here.

Fool contributor Morgan Housel owns shares of Berkshire Hathaway and Procter & Gamble. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway and Procter & Gamble. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (41) | Recommend This Article (68)

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  • Report this Comment On May 02, 2012, at 3:18 PM, Gregory63 wrote:

    I am shocked that I think I generally agree with Greenspan on this one: stocks are fairly cheap right now when you consider their returns compared to Treasuries.

    They are, of course, more risky too, and I would feel a little more comfort as an investor if people like Greenspan would take a stick to people calling for Austerity in the EU and US right now.

  • Report this Comment On May 02, 2012, at 4:12 PM, Ravi786 wrote:

    I cannot believe that Alan Greenspan is still giving advice and there are people who are listening and analyzing his advice.

    Correct me if I am wrong, isn't he the same guy who was wrong again and again and again on economy

  • Report this Comment On May 02, 2012, at 5:32 PM, barbiee01 wrote:

    Perhaps before listening to what Greenspan may say about stocks, I might want to know how is portfolio has done over the last few years? I would guess he doesn't do the investing himself?

    Because he was the FRC, I am not quite sure why that would give him any more credence than our next door neighbor?

  • Report this Comment On May 02, 2012, at 5:47 PM, swiver wrote:

    A lot of 'em are a lot cheaper than the day I bought them.......

  • Report this Comment On May 02, 2012, at 5:48 PM, TedKaye wrote:

    The operative words are "right now". If earnings tank next quarter.......

  • Report this Comment On May 02, 2012, at 6:07 PM, theberg13 wrote:

    Greenspan himself admitted that he choose words to confound his readers. He was a disaster on the economy. Why should we pay any attention?

  • Report this Comment On May 02, 2012, at 6:07 PM, xetn wrote:

    Greenspan: the guy that created the dot.com bubble by increasing the money supply and driving down interest rates, only to reverse and cause the dot.com crash.

    What a guy.

  • Report this Comment On May 02, 2012, at 6:20 PM, WAYNE11111 wrote:

    GREENSPAN HAS ALWAYS BEEN VERY CLEAR ABOUT HIS ADVICE.

    REMEMBER HIS STATEMENT "IF YOU UNDERSTOOD ME I MUST HAVE MISSPOKE.''

    YOU GOTTA LOVE THAT KIND OF LOW QUALITY IN POSITIONS OF HIGH INTEGRITY.

  • Report this Comment On May 02, 2012, at 7:00 PM, VietnamVet1 wrote:

    Is he still kicking? By this time I would have thought he was in Economist Hell.

  • Report this Comment On May 02, 2012, at 7:02 PM, Terrang wrote:

    Right, Greenspan used double speak and duplicitousness. So if he says stocks are cheap we interpret that to mean they will become cheaper...

    He should have been allowed to own stocks as Fed chairman so that he would have shared in the pain.

    Still cheering that Larry Summers did not get the World Bank job. He was one of the three stooges along with Rubin and Greenspan, who successfully lobbied Congress to not regulate derivatives, as the CFTC requested in 1998.

  • Report this Comment On May 02, 2012, at 7:09 PM, vb2003 wrote:

    Allen Greenspan is another financial "genius" still around ! They should bury him really really deep when he dies because he has a tendency to not keep jumping out of the retirement grave. He thinks he can still "help". No thanks.

  • Report this Comment On May 02, 2012, at 7:14 PM, fab2121 wrote:

    Please keep this instigator of the greatest train wreck in history OUT OF THE NEWS FOREVER.

    Why aren't persons like himself in prison??!!

    Just get me a photo of him hanging from a tree . . .

  • Report this Comment On May 02, 2012, at 7:15 PM, eldetorre wrote:

    The stupidity that is demonstrated by his remarks is unfathomable. This is circular logic at its best. Higher stock prices must be justified because they are higher. HUH?!! Treasuries are an unrelated correlational metric to measure by.

  • Report this Comment On May 02, 2012, at 7:27 PM, bretco wrote:

    He made a few REALLY BIG mistakes but he also did a lot of things right and we all cheered him on at that point in time so ya'all should cut him a little slack here. He admitted his errors and whom among us hasn't made a few errors ?

    He still possesses wisdom far beyond that of most Fools.

  • Report this Comment On May 02, 2012, at 7:49 PM, ichbinhxm wrote:

    The last person you can trust!

  • Report this Comment On May 02, 2012, at 8:33 PM, 48ozhalfgallons wrote:

    The Fed (Greenspan) bailed out LTCM in '98. You'd think we would have learned. Greenspan-Bernanke. Dean Martin and Jerry Lewis if they were still alive would have run a better economy.

    Dow at 13268 on low volume, $15.4T debt, a consumer economy with no prospects, paper money, 18% real unemployment, 60 million on SS, super inflation on the doorstep, EU, Muslims, Obama...... Yeah, stocks are cheap. No, I'm sorry Greenspan. Printed money is cheap.

  • Report this Comment On May 02, 2012, at 8:38 PM, tnk4800 wrote:

    Bang! Pow!! Zoooom to the moon, he's a real riot!

  • Report this Comment On May 02, 2012, at 9:30 PM, frozenfour wrote:

    Another boom brought to you courtesy of Alan Greenspan. His buddies down at the club are rubbing their hands with glee thinking of the billions they'll drain from us suckas

  • Report this Comment On May 02, 2012, at 9:39 PM, woodNfish wrote:

    I was wondering what kind of comments I would find after this article. I am pleased to learn that a lot Fools are not fools.

  • Report this Comment On May 02, 2012, at 11:12 PM, wrenchbender57 wrote:

    A lot of Greenspan's ideas were spot on. However, I think he gave in to political pressure and kept interest rates too low for too long. Also, he did not go for more regulation when he should have. He was too enamored of the free market concepts. Which is fine up to a point. But, without the controls that go along with the free market, well we all know where that took us. However, I think it is a mistake to blame A.G. for the entire mess. Many others were also responsible. A.G. could not and did not control the economies of the entire world.

  • Report this Comment On May 02, 2012, at 11:50 PM, PALH wrote:

    Sorry, but Greenspan's time as a credible observer -- even if he proves to be coincidentally correct about this -- is long over. It ended about the time he started urging people to buy adjustable rate mortgages.

  • Report this Comment On May 03, 2012, at 12:29 AM, Risky88 wrote:

    Guy came out publicly after the crash and after his assessments

    Said he was wrong because the market does need regulation

    Even if you disagree with what he said.

    I think the guys got character

    As far as I know, no one in public office or in the public eye

    hardly ever admits what he said about himself

    Especially after how many years preaching and enacting the things he was doing.

  • Report this Comment On May 03, 2012, at 4:27 AM, jimmymackisback wrote:

    Bernanke and Greenspan should be imprisoned with Made-off.

  • Report this Comment On May 04, 2012, at 3:12 PM, LoadDrive wrote:

    Stocks are "Cheap!!! This come's from the same man that was telling people (Just before the housing-crash) to get adjustable rate mortgages! How did that work out ?? LOL ! These people don't live in the Real-World. Most stocks are WAY Over-Priced at this time, thats why I have been cutting back and Locking the Profit away...till the prices come down. Remember: Hard Profit in the hand, is Better then two Wishs in the other hand.

  • Report this Comment On May 04, 2012, at 8:42 PM, kahunacfa wrote:

    Listening to an Economist spout-off about stocks is as risky to your wealth as was the Financial Collapse deftly Engineered by the Alan Greenspan directed Federal Researve System.

    Greenspan put far, far too much faith in: The Free Market System's willingness to correct financial inbalances and sometimes outright Fraud <1. Robo-signing run Wild, 2. Mortgage paper being sold before the ink on the documents was even dry, 3. The complete Failure of the Credit-Rating System by the major players: Standard & Poors <who made many Poor> and Moodys, <who needed a daily dose of Prozac(R) to cure a bi-polar mood disorder!>.

    The System Failed, the Institutions charged with keeping things on track <The Federal reserve, FDIC, Rating Agencies, the Mortgage backed Securities brokers, and yes the Institutional Investors who failed to do their jobs by asking the much needed critical questions at the critical times.

    Now, comming-out of the Bush Administration's lazy-fair policies, the Banks will NOT lend, why should they lend Risk Capital to businesses, especially small businesses, when there is a positive risk-free interest carry by paying "SPIT" on savings deposits and buying nearly risk-free 3-5 -year US Government paper? The short answr is that the banks do not make loans when a small business applies for a loan.

    Oh, back to stocks... Stocks, in general, are NOT cheap ,although some stocks always are>. Stocks as measured by the market averages are approximately fairly valued -- kind-of-like Business as usual.

    Kahuna, CFA

  • Report this Comment On May 05, 2012, at 1:29 AM, billbailoutbill wrote:

    When I was younger I thought the Greenspun was great, because I could not understand him and thought he was so sharp. As I got older and understood him better and realized that he did not know what he was talking about. He is the last person I would take advice from.

  • Report this Comment On May 05, 2012, at 7:51 AM, Ics54 wrote:

    We need another Volker.

  • Report this Comment On May 05, 2012, at 11:32 PM, sl1ver wrote:

    Alan Greenspan? You mean the guy that wrote, I mean the sellout that wrote an article for Ayn Rand's newsletter on how gold should be the standard? What is the story behind that? Truth is truly stranger than fiction!

  • Report this Comment On May 05, 2012, at 11:35 PM, sl1ver wrote:

    We need another guy like the one that said that should he be elected chairman or president or whatever, he would abdicate. Follow the fool that won't be followed.

  • Report this Comment On May 06, 2012, at 8:40 PM, xferjenx wrote:

    I don't think PG falling less than 5% over a week is "falling hard".

  • Report this Comment On May 06, 2012, at 9:10 PM, MoneyWorksforMe wrote:

    The world will be a much better place when this guy is dead.

    I would much rather resort to flipping a coin than listen to this financial criminal's "advice."

  • Report this Comment On May 07, 2012, at 11:19 AM, JimmyZangwow wrote:

    Stocks are cheap compared to what? He needs glasses. Oh, wait...

  • Report this Comment On May 07, 2012, at 8:04 PM, FutureMonkey wrote:

    Such vociferous complaints about the man. Ignore the source, does what he said make sense?

    Is there an equity premium (return relative to bonds). Consider that equities are financial assets that return future cash earnings. vs. bond which return a fixed interest rate and then the original principal at maturity. For "stocks to be cheap" then you have to believe that the price you are paying for predicted future cash is greater than the risk premium, loss of purchase power (inflation) relative to bonds -- which at current coupon rates are basically guaranteeing you a return equal to your principal. The only scenario where current bond investments make sense is if you predict deflation in the next decade, in which case the purchase power of your principal grows in spite of a miniscule interest rate.

    My take is that the broad market is fairly valued relative to current earnings (juiced by volitility in margins and cost savings restructuring). If future earnings growth returns a historical growth rate of 3% compounded annual growth (as seen in 1970, 1980, 1990) and not the 2% seen last decade AND we don't experience either excess inflation or deflation, we can expect a steady eddie return that meets most of our expectations on money invested now. If we grow at 2% or worse grow at 2% AND experience inflaton or deflation, then we are pretty much going to suck on another decade of sideways markets and likely loss of purchase power for our dollars invested in equities; bonds might do better than equities in an environment of deflation; commodities/precious metals probably does better in an environment of hyperinflation.

    My take on the macro-stuff is to focus on total portfolio returns, risk-management, and regular investing in superior companies with strong future earning potential; I'm particularly interested in the BRIC and MIST international companies or US businesses with exposure to those markets. I see no value in avoiding the equities; staying out of the market is a definite loser strategy, unless we magically rise to strataspheric P/Es. Since we are nowhere near strataspheric P/E, whether you think stocks are cheap or fairly valued, anticipate inflation, deflation, or price stability, now is definitely a fine time to continue regular investment and accumulation of equities with a reasonable risk balance based on your need and risk tolerance.

  • Report this Comment On May 09, 2012, at 8:37 PM, Alwayzwrong wrote:

    As an economist, I'm embarrased every time Greenspan shows his face in public. Even now he refuses to do the right thing, which is to go away quietly.

  • Report this Comment On May 09, 2012, at 8:39 PM, Alwayzwrong wrote:

    Not to die. I don't harbor any contempt for him. Just become more private, like a certain ex-president.

  • Report this Comment On May 10, 2012, at 12:20 AM, NovaB wrote:

    Greenspan is a buffoon, an economic terrorist of the worst kind.

    Back in the 1960s and 1970s banks paid interest rates in the 5-6% ranges. If you weren't making 5.5% you took your money elsewhere.

    Then came Greenspan and the Reaganomics disaster. He forced interest rates into the basement. Millions of Americans had retired or were building retirement accounts based on savings and interest paid. Greenspan destroyed all that and sent millions of elderly Americans into poverty.

    At the same time Reagan and his cabal of economic idiots were shipping jobs overseas as fast as they could so Americans could live life as leisurely consumers. Tip O'Neil said it best when declared Reagan an economic moron.

    Nevertheless, we live in a Greenspan-engineered world, as bleak as that may be the right-wing buffoonery still to this day tout as successful. Yes, it is, if your name were Hilton, McConnell, Boehner or Bush.

    For people like me forced to manage my own retirement savings, I come to the Fool, listen to advice and invest in a long series of failed recommendations. My IRA is worth less today than it was 3 years ago after shoving an additional $12,000 into it.

  • Report this Comment On May 10, 2012, at 5:20 PM, obiwan48 wrote:

    Greenspan is quoted as saying PG "fell hard last week".

    What is the definition of falling hard?

    A few percentage points?

    Falling hard is what happened in the Autumn of 2008 continuing on into March of 2009.

    The reality is, in today's world,(due to the world's situation on many levels), even the best run companies can lose 50% of their value in short order.

    Today, it amazes me of the sheer genius of the vast array of advanced psychological methods being deployed in the financial world to convince people to buy stocks.

    ETF'S?

    Anyone on Wall Street selling them should have their photo taken next to their ETF recommendation.

    Why?

    So everyone company and individual can be reviewed with is a "year book" format showing their performance for the past year.

    Most ETF are essentially a terrible investment, with many of them, based upon the sales pitch bordering on fraud.

  • Report this Comment On May 10, 2012, at 6:17 PM, pixelrebel wrote:

    HAHA!!! Greenspan says JPMorgan is a strong buy, then WHAM, JPMorgan posts MASSIVE LOSSES. HILARIOUS!!! IDIOT

  • Report this Comment On May 10, 2012, at 9:21 PM, pradeepms wrote:

    Greenspan should retire in a old age pension home something is wrong with him He messed up our country and now trying to mess up the investing publlic Greenspan please keep ur mouth shut

  • Report this Comment On May 10, 2012, at 9:23 PM, pradeepms wrote:

    Its the fault of the press to publish what he says He has no place among intelligent people He has to read the Bible and comment on that if he still can>???

  • Report this Comment On May 17, 2012, at 2:18 PM, thidmark wrote:

    The idiocy in many of these comments boggles the mind.

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