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Yellen's Easy Money Further Inflates The Bubble

NEW YORK (TheStreet) -- Janet Yellen told Congress this week that if she becomes the next chief of the Federal Reserve, the ridiculous policy of a 0% to 0.5% federal funds rate that began in December 2008 will continue for the foreseeable future.

It also appears that quantitative easing will continue without tapering until the next meeting of the Federal Open Market Committee in late-January. As a result, the equity bubble continues to inflate. The Standard & Poor Index, the U.S. benchmark, has gained 26% in 2013, poised for its best year since 1997.

Quantitative easing was supposed to bring down long-term interest rates, not inflate equity bubbles. Look at the yields on the benchmark Treasury 10-year note and the Treasury 30-year bond.

The Federal Reserve began QE3 and QE4 in September and December 2012, and the 10-year yield was at 1.548% at the close in August 2012 with the 30-year bond yield at 2.668%. These yields reached multiyear highs at 3.007% and 3.94% on Sept. 6 and Aug. 22 this year.

Must Read: Where Are the Jobs?

Our potential future Fed chairwoman testified that interest rates were lower since these QEs began. Well, that's just not true.

We know that the Fed-induced bubbles for gold and crude oil popped in September 2011 and July 2008. We know a bubble in equities popped in October 2007. When stocks formed a quick V-shaped bottom in March 2009, I remember at least one headline that read "Dow 5000."

When a bubble is inflating, you don't know when it's going to pop. Back in March 2000 with the Nasdaq above 5100, most strategists remained bullish on technology stocks. Today most strategists say that the stock market remains cheap and will continue to move higher.

ValuEngine shows that 85% of all stocks are overvalued with 54.1% overvalued by 20% or more. What's keeping the stock market bubble inflating is strong technical momentum as Wall Street speculates using cheap money pumped in by the Fed, which it will continue to do so under Yellen.

Today's market pulse shows that the Dow Industrial Average, S&P 500 and Dow Transports set all-time highs or multiyear high for the Nasdaq yesterday. Additional new highs are obviously possible, but the upside to my risky levels is only 0.6% on Dow Transports.

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Chart of I:DJI
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S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

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