Then there are household 12-month inflation expectations, which rose to 3.4 percent in the April preliminary University of Michigan Consumer Sentiment Survey compared with 1 percent in November 2001. The latest reading is identical to that in early 1994, Carson says.
So why the policy change? "I think Greenspan is thinking that a continuation of stock market values above rational fundamentals exists," says Michael Boldin, an economist at the University of Pennsylvania's Wharton School. "I'm guessing he is trying to play a game where he is hoping the real economy soon has an engine of its own to guarantee growth, no matter what the stock market does, before Fed policy adds any significant braking. He may not be able to win the game no matter how smartly he plays it." It's a tough order of business to restore Corporate America to profitability after the bursting of arguably the biggest bubble in history, even for a Maestro like Greenspan.
"He's trying to solve all of the world's problems through monetary policy," Carson says. "There's nothing he can do about high P/Es." Once the equity market has had a big run, sending valuations soaring well above the earning power of American corporations, it's hard for the "E" to catch up with the "P."
"Greenspan can create liquidity, but he can't direct where liquidity goes," says Carson, adding that the current preference is for real assets, such as housing, rather than financial assets.
"Why reflate an asset that's already inflated?" Good question. The Standard & Poor's 500 Index is trading at almost 58 times last year's earnings and 21.5 times next year's, according to Bloomberg analytics. Carson says that the average P/E ratio over the last half-century is 16, which means "it's hard to make money when it's this high." Housing went through the same kind of workout process in the early 1990s, when home prices were pretty much flat for four years until personal income rose enough to support the lofty prices. The stock cycle exhibits a similar pattern, Carson says.
While low rates won't fix extended stock market valuations, what they will do is ensure that the rest of the economy has a wind at its back. Without a rudder, however, there's no guarantee the economy won't end up on the rocks.
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