How do we know when irrational exuberance has unduly escalated asset values?
By putting downward pressure on interest rates, the Fed is trying to make financial conditions more accommodative - supporting asset values and lower borrowing costs for households and businesses and thus encouraging the spending that spurs job creation and a stronger recovery.
Only a strong economy can create higher asset values and sustainably good returns for savers.
I think we have a bubble in the US in government bonds, because of the quantitative easing and the negative real interest rates, and to some extent, that increases asset values across the board, including in startups.
Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices, ... This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums.
In an economy that already has lost some momentum, one must remain alert to the possibility that greater caution and weakening asset values in financial markets could signal or precipitate an excessive softening in household and business spending.
If you let interest rates be freed, be set by the free market, they would rise dramatically. There would be a lot of broken furniture on Wall Street. It needs to be broken. The back of the speculative bubble would be broken and we could slowly heal the financial system. That's what I think we need to do but it's never going to happen because there's trillions of asset values dependent on the Fed continuing to suppress, repress interest rates and shovel $85 billion a month of liquidity into the market.
The dominant factors affecting control valuations are earning power (past and prospective) and asset values.
