Janet Yellen, the head of the US Federal Reserve, has come to investors' rescue again, giving the US sharemarket that vital extra dose of confidence required to keep it trading at lofty levels in the lead up to the November US presidential election.
Yellen's latest intervention – in the guise of an abstruse discussion on the shortcomings in economic theory – has revived investor appetite for risk by holding out the tantalising prospect that US interest rates will remain very low, even if US economic activity heats up.
As Yellen noted in her speech on Friday, one of the big questions raised by the torpid economic recovery was whether the slump in overall demand after a major economic crisis resulted in a shrinkage in an economy's potential output.
The next question, she said, was "whether it might be possible to reverse these adverse supply-side effects by temporarily running a 'high-pressure economy' with robust aggregate demand and a tight labour market".
This "high-pressure" economy, she argued, would likely encourage companies to spend more on new equipment, which would spur future growth. And it would also encourage individuals to start looking for work again, which would expand the size of the labour force.
At the same time, running the economy hot could encourage increased spending on research and development, and motivate people to set up innovative businesses.
Even if investors struggled to follow Yellen's arcane theoretical arguments, they had no difficulties in seeing that her conclusion was unequivocally bullish for equity markets because it suggested the Fed was likely to keep interest rates extremely low even as the economy heated up.
If running the economy hot for a period of time after a slump could help reverse the damage to potential output, Yellen argued, "then policymakers may want to aim at being more accommodative during recoveries than would be called for under the traditional view that supply is largely independent of demand".
Some analysts pointed out that Yellen's extremely cautious approach to future US rate rises was already apparent in the decidedly dovish tone in the minutes of the Fed's September board meeting, released last week.
But, of course, Yellen's objective isn't just to reassure investors that interest rates will remain extremely low for an extended period of time.
She also has to convince them that the US economic recovery is on track, and, especially, that the improvement in the labour market will be reflected in robust consumer spending, which will help boost corporate revenues.
At the same time, however, she has to be careful not to suggest that US economic growth is vigorous enough to warrant a sharp increase in short-term interest rates because this risks puncturing the bubble in the global bond market by sending US bond prices tumbling.
Yellen, of course, is deeply aware that market confidence is fragile. Investors, who remain jittery about Deutsche Bank's thin capital buffer, have been further unnerved by reports that German Chancellor Angela Merkel has ruled out taking an equity stake in the embattled German bank.
The reports are likely to put even more pressure on Deutsche as it tries to negotiate a quick settlement with US authorities over alleged mis-selling of mortgage-backed securities in the lead-up to the 2008 financial crisis.
Last month, the US Department of Justice hit Deutsche with an unexpectedly high opening demand of $US14 billion, sparking a vicious slide in the bank's share price.
Yellen is also aware that investors are nervous about the third quarter earnings season, which got off to a bad start last week when Alcoa missed profit expectations and lowered its revenue forecasts.
Though the great bulk of companies have yet to report their results, investors are understandably nervous that US corporates look set to notch up their sixth straight quarter of declining earnings. This is a major concern because the absence of profit growth makes it extremely difficult to justify the current level of the US sharemarket.
Until now, investors have tended to overlook poor earnings performance, focusing instead on the generous dividends and share buyback schemes that US companies have unveiled, often using borrowed money to do so.
But analysts warn this process may be coming to an end because many US companies risk losing their coveted investment grade credit rating if they continue to increase debt levels.
Rather than risk a "junk" credit rating, analysts predict US companies may begin to pare back the generous dividend and buyback policies that have helped buoy the US sharemarket close to record highs.
