Why have market returns been able to average even 3.5% over the past 14 years? Simple. Valuations have been pushed, once again, to some of the highest levels in history. Instead of terminating this 14-year period anywhere near historical norms, the ratio of market capitalization to GDP presently stands at 1.25, which is double its historical norm.


In her first public speech on monetary policy, Janet Yellen made it clear that the Fed intends to pursue a more rules-based, less discretionary policy. This is good news. The bad news, however, is that Yellen focused only on employment and inflation. In that same speech, not a single word was said about attending to speculative risks or financial instability (which are inherent in Fed-induced, yield-seeking speculation). Without attending to that third leg, the Fed is resting the fate of the U.S. economy on a two-legged stool.

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