My colleague Amber Hestla is a Wall Street veteran. She’s also an Army veteran who lived through a shooting war in the Middle East.

Amber Hestla (pictured here in fatigues) is the chief investment strategist of the trading services Income Trader, Profit Amplifier, Maximum Income, and Precision Pot Trader.

Amber served in Operation Iraqi Freedom. While deployed overseas with military intelligence, she learned how to analyze reams of data to create precise situational awareness for her battlefield comrades.

For this interview, I asked Amber to apply those analytical skills to the financial markets. My questions are in bold.

In the U.S., unemployment currently hovers at 8.4% and GDP growth for 2020 is projected to come in at -5.9%. Meanwhile, for Q4 and calendar year 2020, analysts estimate corporate earnings declines for the S&P 500 of -13.0% and -18.5%, respectively. Amid this dismal backdrop, can you justify the stock market’s lofty valuations?

Justifying the current valuations is easy. Former Federal Reserve Chair Ben Bernanke did that years ago when he explained:

“Paul Samuelson taught me in graduate school at MIT, if the real interest rate were expected to be negative indefinitely, almost any investment is profitable. For example, at a negative (or even zero) interest rate, it would pay to level the Rocky Mountains to save even the small amount of fuel expended by trains and cars that currently must climb steep grades.”

Ben Graham, the father of value investing, explained the relationship between the bond market and the stock market by comparing the interest rate on long-term bonds with the price-to-earnings (P/E) ratio on stocks. Graham actually used the earnings yield, which is the inverse of the P/E ratio. A P/E ratio of 10 is equal to an earnings yield of 10%; a P/E ratio of 20 is equivalent to an earnings yield of 5%. Graham said investors should use the earnings yield to identify value.

Yields on long-term bonds are about 0.7%. That equates to a P/E ratio of about 143. Given current rates, stocks are cheap.

What are the biggest risks facing the stock market right now?

The biggest risk is interest rates. Rates can stay low only as long as investors believe the risk of default and inflation are low.

In theory, the risk of default in Treasury notes is low. Given current political divisions, that risk is probably increasing. When the risk becomes significant, rates will rise but, for now, all of us investors agree to pretend default is impossible.

We also all agree to pretend inflation isn’t a risk. The Federal Reserve told us there’s nothing to worry about.

History shows that inflation isn’t a risk until it is. For now, it isn’t because investors have confidence in the Fed. At some point, investors will question the Fed as inflation spikes higher. That’s the risk, and it could come tomorrow or 10 years from now. It will be sudden, and I’m watching for that.

A handful of Big Tech stocks account for most of the stock market’s recent gains this year. Doesn’t this top heavy situation make the market vulnerable to a massive sell-off?

Markets are normally top heavy. I just saw a nice chart that makes that point:

In the early 1800s, finance dominated the stock market. That makes sense because the young country needed capital to grow. Railroads then dominated the market as the growth that was financed earlier in the century resulted in products that needed to be moved.

Eventually, those sectors shrank, after decades of growth.

In the 20th century, you can see that utilities grew in importance in the 1920s as homes were electrified. Materials were an important sector when manufacturing was important in the middle of the 20th century.

Right now, tech is delivering the next phase of economic growth. It should be big, and it will be replaced in time.

Bond yields are extremely low. What’s the bond market trying to tell investors right now?

Bonds are telling us that the Fed is in charge for now. That will change. The change will be sudden and when that shift occurs, the stock market will collapse. So, for now, we pretend the Fed is omnipotent and it can continue extending the bull market.

Read This Story: Will The Fed’s Money-Printing Lead to Ruin?

The Fed has gone well past normal stimulus, but anything the Fed decides to do is sustainable. The Fed has unlimited resources and can buy every bond in the world if it chooses to. That process could even be implemented in minutes noting that all bonds quoted in Bloomberg and not issued by countries or companies subject to U.S. sanctions would be bought at the price determined by a pricing service.

We’ll probably see the economy bounce back in early 2021. How robust do you expect the recovery to be?

The rebound depends completely on consumer and business confidence. Confidence depends on the presidential election. Let’s circle back to that in November, or December if there are some questions about the results.

Editor’s Note: Amber Hestla just provided us with valuable investing insights, but I’ve only scratched the surface of the vast expertise that’s available on the Investing Daily team.

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John Persinos is the editorial director of Investing Daily. Send your questions or comments to mailbag@investingdaily.com. To subscribe to John’s video channel, follow this link.