At the risk of cross-threading the discussion, you need to account for 2nd and 3rd order impacts when trying to figure out where supply and demand will reach eq

At the risk of cross-threading the discussion, you need to account for 2nd and 3rd order impacts when trying to figure out where supply and demand will reach equilibrium. In particular, r->0 (asymptotically) is problematic because of somewhat opaque issues with DCF pricing. In particular, R(r) where R is the market discount rate and (r) is the risk free rate. Lets assume the fed is manipulating (r) and that R(r) is directionaly (+). That is fair enough. But R is also impacted by exogenous preferences setting (for risk, weath effects, substitution effects). While these preferences may be stable in theory at "normal r" (~econ 101 assumption), they are empirically not independent of (r) as r-->0 and so are not stable at all in our test case. In fact, as (r)-->0, it becomes more and more rational to take on extreme risk (especially so if (r) is temporarily/ artifically low. After all, you are playing with "free money". Now, lets assume that you have shifted gears in this way. Lets further assume you have a choice of two investment classes: (a) Low risk and (b) High Risk. Its clear you will weight your portfolio towards (b), purely through the change in preferences. This change in <preferences> will change R(r) and show up in your DCFs (ie, when implied by market pricing). In other words, the only way 'DCF' will make sense is when you plug in R'(r)=|=R(r). But now lets consider the subset of (b) in isolation. Given the result above, R'->0, stocks that have non-transparent, distant income will become relatively more attractive. That is to say, the current prices will look too low. So, you will overweight these stocks (bidding up prices). But not only will you in general bid up all assets (due to little r) you will bid up disporportionately equity vs debt and furthermore non-transparent risk equity vs lower-risk equity. As a result, you <should> expect huge price increases for stocks whose investments will pay off in 5-10 years. Or at least, so the theory goes.