Most analysts insist that investors shouldn’t fight the Fed, but Ed Yardeni, chief investment strategist at Deutsche Bank Alex. Brown, is taking issue with the Fed’s latest rate action.

Yardeni says that he believes the U.S. Federal Reserve Board made a mistake in cutting interest rates 50 basis points on Tuesday. He argues that the cut was not necessary at this time. “That was the message from the bond market (rising yields), the yield curve (steepening slope), and the stock market (rebounding prices) following the previous rate cut on April 18. More recently, the rising prices of gold and gold stocks also confirm the growing market consensus that the Fed may be easing too much. The rapid growth in M2 also suggests that the Fed has done enough to revive economic growth later this year, and may now be overshooting on the easing side.”

Yardeni says he’s not quibbling with the cut itself, but the press release that explained the reasons for the action. In that announcement the Fed reiterated that the economic risks are still on the downside and that monetary policy is still biased to ease.” In my opinion, the message should have observed that the federal funds rate has been cut five times in five months by 250 basis points to 4%, and that this might be enough for now. The message should have been biased toward a neutral monetary policy stance.”

The problem for Yardeni is that the added liquidity won’t help the economy, but will fuel the stock market. He suggests that, “Now, the Fed is providing easy money to minimize the pain resulting from the bursting of Bubble I, which seems to be setting the stage for Bubble II.”

The message Yardeni hears is that the negative equity wealth effect has gone too far, and it now wants a rebound in stock prices. “The Fed’s welcome wagon is stocked with lots of bottles of champagne, and the speculators are drinking the liquidity with gusto. The bubbly is bringing back irrational exuberance fast.”

By definition, bubbles aren’t sustainable, but Yardeni says he likes them as opportunities to make money. “You can make lots of money very quickly when a bubble is inflating, as long as you get out just before it bursts. As of yesterdays close, the S&P 500 was 25% overvalued based on the Fed’s Stock Valuation Model. Five more percentage points and the market will be as overvalued as it was just before the 1987 crash, though it would still be cheaper than at the start of last year when it was 70% overvalued. But that was Bubble I. Bubble II may surpass the 1987 overvaluation, but I suspect it will burst somewhere below the 70% level.”

“The Fed is certainly our friend. However, true friends don’t let their friends drink and drive. I would prefer an earnings-driven bull market rather than a liquidity-driven one. For now: May the bubble be with you!”