A giant disconnect has emerged in what was formerly known as the "market" before the Fed took over: as highlighted in the latest BofA Fund Manager Survey, on one hand Wall Street professionals are extremely skeptical of the rally, with a record 78% of respondents saying the market is overvalued...

... and more than half confident the recent surge is just a bear market rally.

At the same time, hedge fund net equity exposure soared to 52% from 34%, highest since Sept’18 and one of the highest levels on record, as hedge funds chased retail investors into risk assets.

Why this apparent schizophrenia? There is simple answer, one which BMO's rates strategist Ian Lyngen today encapsulates as "a great question", and boils down to this: "how far will the Fed let stocks rally before it’s simply too much?" and one which unfortunately nobody knows the answer to: after all, the Fed has now fully embraced the bubble and as Powell said last week, liquidity will continue to be injected as long as it "preserves" jobs even if it means pushing risk assets to nosebleed bubble levels. And while nobody knows what is in Powell's mind, here is Lyngen's attempt to answer this "great question."

The Fed’s lack of ability to generate demand side inflation has been a disconnect between the traditional monetary policy framework and the actual results for years; long before the pandemic gripped global markets. The near-term disinflationary headwinds will occupy policymakers for much of the balance of 2020 and our expectation is that a reliance on asset-price inflation will remain thematic.

This dynamic has played out since global equities bottomed in mid-March and with the S&P 500 futures breaking above 3100 overnight it’s a difficult relationship to fade in the current environment. The reliance on financial conditions as guide for the Fed and the correlation between the VIX and the FCI leaves the Powell Put as effectively a permanent market feature.

As an astute client asked ‘how far will the Fed let stocks rally before it’s simply too much?’  Alas, another brilliant inquiry to which we can only sheepishly shrug our shoulders, cast our eyes downward, and respond ‘that’s a great question’.

At some point the systemic risk from overheated equity valuations will trump the Fed’s efforts to reemploy the US labor force, but given the broader ramification of persistently elevated unemployment, we suspect Powell will find it difficult to shift policy in the foreseeable futures simply to prick an asset bubble when so many are still without gainful employment.

And that's why with each passing month more and more professional investors will lament the giant bubble that is the market, even as they have no choice but to plow even more freshly print money into it.