Over the past 12 months, the friendly Fed-induced liquidity is giving strong support to the valuation of risk assets. PIMCO's Paul McCulley in his November 2009 newsletter, "The Uncomfortable Dance Between V’ers and U’ers," succintly summarizes the current market dilemma.
"Simply put, big-V’ers should be wary of what they wish for. U’ers, meanwhile, must be mindful of just how bubbly risk asset valuations can get, as long as non-big-V data unfold, keeping the Fed friendly. But that’s no reason, in our view, to chase risk assets from currently lofty valuations. To the contrary, the time has come to begin paring exposure to risk assets, and if their prices continue to rise, paring at an accelerated pace."
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