"I would classify this as being in bubble territory."
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jdaasoc...
There is no question that current valuations put us well into bubble territory, although no where near the extent that we were a couple of years ago. That, however, may be the whole idea here from the Fed's standpoint.
A bit of speculation on my part on what Greenspan may be up to.
When the Fed first mentioned using unconventional means to fight a weakening economy once rates were already near a practical bottom, we all wondered what all this might entail. We had already been introduced to the PPT as a means of preventing market meltdowns, but this was obviously something else again. The study of the Japanese problem and the recent talks by Greenspan and Bernanke have solved much of the puzzle and Greenspan is now fighting deflation full bore here, without much use of rates.
Al and Bernanke told us that they were willing to monetize their way out of deflation and that appears to be exactly what they are doing by buying up securities in the Fed open market operations and by re-inflating the only asset class available to quickly rebuild wealth - the market. We know that the "wealth effect" has long held Greenspans attention, and he has finally found a good use for it as a target for all the extra cash he is pumping into the system. That is really the only answer that is both logical and fits all the pieces together and until he does something to make me change my mind, I believe that may well be what he is attempting to do.
The auto cycle is dead from buyer exhaustion and the consumer will not be able to rescue the economy due to massive debt. The housing bubble is probably over also, and there is no other source to pump up the economy fast enough to avoid the deflation that we are about to enter unless something drastic is done quickly. The answer is to rebuild wealth by artificially pumping up the market until the consumer (and the economy) can begin to recover - I see nothing else that could work. If that is indeed Greenspan's goal, look for the market to steadily climb higher as the Fed continues to pump money into the system. The dollar will probably weaken, and gold will probably strengthen unless they actively keep it down.
I have doubts that artificial asset rebuilding could do anything more than give temporary respite from the problem, and it could easily make the ultimate end worse than it would otherwise be. It has never been done before, though, so there is no way to know.
mlsoft
