This is an issue that comes up all the time; so let me try to put things in perspective:
1. Asset prices are procyclical, dropping sharply in slumps like 1929-33, 1937-38, 2000-02, and 2007-09. (This entire post focuses on real asset prices.)
2. Interest rates are also strongly procyclical. Thus interest rates and asset prices often tend to move in the same direction.
3. When interest rates fall for reasons other than the business cycle, asset prices tend to rise. Thus if rates fall due to a global savings glut, it will tend to raise asset prices. That’s the most likely explanation for the asset price boom of 2009-15.
4. What about monetary policy? Asset prices tend to rise when monetary policy is easier that expected. But on closer examination it seems like real stock prices don’t “like” either easy or tight money, stocks like stable money. Stocks do very well in low inflation booms (1920s, 1980s, 1990s, etc.) and do poorly during either deflation (early 1930s, 1938, 2009) 0r high inflation (1966-81). Thus it would be more accurate to say that stable money is good for stocks, not easy money. The January stock slump is accompanied by lower interest rates, but not caused by lower interest rates. It’s caused by the thing causing lower interest rates (lower NGDP growth expectations—and hence tighter money.)
5. David Glasner did a study that suggests stocks tend to rise strongly on easier money (bigger TIPS spreads) precisely when deficient AD is a serious problem. That shows that asset markets “root for” sound monetary policy. In the 1980s, asset prices rallied on tighter money (lower NGDP growth.)
Conclusion: Monetary policymakers are probably unable to create bubbles, even if they try. That’s because asset prices will be highest when policy is boring and appropriate. Monetary policymakers can create asset price crashes by doing crazy stupid things, but they cannot push real asset prices higher than they would be with sound policy. Trump might say that asset prices like situations where “America wins.”
This post is similar to a post I did over at Econlog (which is the better post, BTW.) There I pointed out that wage growth usually slows when RGDP growth slows, but paradoxically lower wage growth causes higher RGDP growth. And interest rates usually fall when NGDP growth slows, but paradoxically when the Fed cuts its target rate that causes NGDP growth to rise. Now we can see that interest rates usually fall when asset prices crash, but paradoxically a Fed target rate cut usually boosts asset prices.
The failure of reporters to internalize the implications of these paradoxes explains much of the nonsense you read in the media, such as the current popular theory that Chinese devaluation is deflationary. The real issue is, “does Chinese devaluation cause other central banks, in places like Brazil, to run more deflationary monetary policies?” Or, “does Chinese devaluation reflect weak growth, cause stronger growth, or both? And what is the independent effect of each of those factors?
PS. A comment by Kevin Erdmann over at Econlog anticipated some of my thinking on this issue.
I will be traveling today, not much time for comments.