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Head of Federal Reserve hits nail on head

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Internet Security Threat Report 2014

Alan Greenspan -- chairman of the US Federal Reserve -- has added his voice to the growing debate over the current speculative euphoria concerning Internet stocks. In an address to the Senate Budget Committee yesterday, he agreed there was a valid comparison to be made between the stock market and a lottery. Yet that supposes that when the Internet bubble finally bursts -- and burst it will -- that there will be some investors who will have opted out just before the mess hits the wall. By the law of averages, some people will get away with it, but would you get better odds dabbling in Net stocks or shelling out for a lottery ticket? A spokeswoman for Camelot, the company behind the UK's National Lottery, refused to discuss the subject or confirm whether the analogy was a slur on the good name of lotteries in general. For Greenspan, it's more than valid as he warned that "hype" is driving up stock prices and that while some may succeed, he said, the "vast majority are almost sure to fail". And if the companies fail, investors lose out too, and with current prices running sky-high and showing no signing of coming down to earth, that could spell disaster -- big time. Yet far from dampening enthusiasm for .com stocks Greenspan's remarks instead helped sow the seeds for a minor rally on Wall Street yesterday showing just how fickle the market can be. It's a view shared by Charles Schwab, co-CEO and chairman of the online brokerage firm that shares his name. He is also acutely aware of the risks involved and written to investors warning them of the market's volatility. In a personal letter posted on Schwab's Web site he takes a different tack warning investors that the market can move at lightning-fast speeds trapping unwary punters. Investors need to be aware that there may be a substantial difference in the price at which they expect to buy or sell a stock, he wrote, and the price they actually find in the market. "Another reason for these high valuations of Internet-related stocks, as with all stocks, is simply supply and demand. "With so many people believing in the profit potential for these stocks, they are willing to pay a very high premium. The limited supply, coupled with huge demand, can drive prices up or down with extraordinary speed," he wrote. "While I have seen investor enthusiasm in many industries over the years, this particular combination of a fast market in Internet stocks, and the access to rapid trading provided through the Internet itself, is unprecedented," he said. Unprecedented it may be, but with so many people issuing such warnings there is a real danger of investor complacency setting in. ®

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