My opinion.
There is an enormous bubble in bond prices (clearly, since bond yields are near zero, and bond price moves as the inverse of the yield) and a smaller bubble in stock prices (as judged by metrics like the Shiller PE). However, the Fed is still printing enormous amounts of money. Eventually bubbles burst, but they can inflate for a while. The bubbles could burst when the Fed starts raising interest rates or a while after that. Or, because people anticipate that things will crash when the Fed does that, it could happen before the Fed does that. Or other world events could trigger it.
I've been an active investor since about 1990, and helped to found a hedge fund in the mid 1990's (so worked that way in the finance industry -- we even managed some Soros money at one point). Since 2008, I have never felt so unsure of where markets are headed or what is a good investment.
Today, there is a war going on between inflation and deflation. Since these are opposites, what works well for investing under one condition is poor in the other, and vice versa. If bad deflation happens, the best investment is cash. If bad inflation happens, the best investment is gold or commodities. Prior to bad inflation or deflation, because of money printing and ultra-low interest rates, bonds and the stock market have been by far the best investments with cash and gold being bad.
People understand the risk of inflation. If there are x dollars in existence, and the Fed doubles that to 2x (which is what it has done since 2008), it's easy to see that prices could go up by a factor of 2.
How can there be a risk of deflation with the Fed printing money like crazy? It can happen when that printed money just doesn't get out and circulating into the general economy.
Both of these things are what is going on. The Fed is printing like crazy, but that money isn't completely making it into the general economy. Whichever one wins, inflation or deflation, it will be horrible for our economy. I fear that the next 15 years are going to be very bad unless the Fed pulls off a miracle on reeling back in the enormous money printing.
However, usually the Fed reacts to a crisis by printing/lowering rates, keeping rates too low too long, fueling another bubble, belatedly moving in the opposite direction, which helps trigger the bursting of the bubble, creating a crisis, to which it reacts by . . . [repeat loop indefinitely]. This has at least been the recent history:
1997-1998: Asian financial crisis, Russian financial crisis, and resultant collapse of Long Term Capital Management prompts Fed to provide a large amount of liquidity and keep interest rates lower than they otherwise probably should have been. That money finds a home in the Nasdaq, helping (along with other factors) to inflate an enormous bubble there. Fed sees this and belatedly starts creeping up interest rates, which helps to burst the bubble.
2000: Nasdaq bubble bursts, causing the worst drawdown on a major US financial index since the Great Depression, causing havoc in the economy. The Fed reacts by taking interest rates drastically lower and keeping them there for several years. This (along with other important factors) helps create an enormous bubble in real estate and mortgage-backed securities. The Fed sees this and keeps moving up interest rates, which helps to burst the bubble.
2007-2008: Real estate and mortgage securities bubble bursts, causing a meltdown of our (and the world's economy), much worse than 2000 crash. The Fed slams interest rates to zero, prints a new 1.4 trillion dollars, and the US government spends over $5 trillion on a bunch of stuff that had no long-term benefit to the economy. The Fed keeps these rates at zero for the next *SIX YEARS* . . . and counting . . .
My feeling is I've seen the next step in this story several times before. Maybe I'll be wrong this time -- Nobelist Paul Krugman and other Keynsians would say I'm wrong. But I've got this horrible feeling that it's going to happen and be much worse than the 2008 crash. I worry about this situation nearly every day.
