Fed-induced speculation does not create wealth. It only changes the profile of returns over time. It redistributes wealth away from investors who are enticed to buy at rich valuations and hold the bag, and redistributes wealth toward the handful of investors both fortunate and wise enough to sell at rich valuations and wait for better opportunities. There won’t be many, because rising prices also encourage overconfidence in a permanent ascent. Few investors are capable of enduring the discomfort of being on the sidelines for very long if a speculative market proceeds further without them.
Only those who sell at extreme valuations have the potential to capture any benefit from them, and that benefit only comes by saddling some other investor with poor returns going forward. This is redistribution, not creation of wealth. For those that fail to exit, speculation only changes the profile of returns over time. Excessive reward for short-run risk tolerance goes hand-in-hand with punishment for maintaining that risk tolerance over the longer-run. Over the next few years, the contrast between these short-run rewards and their long-run punishment is likely to be epic. The median stock is more overvalued than at any point in history. Broad market valuations on the most historically reliable measures we identify now exceed the 2007 extreme, and are on parity with 1929. Only the 2000 peak went further.