The Housing Bubble

At least the S&P 500 futures are holding up well!

New York Markets Open in: 2:52:22
Pre-Market Indications | Analyst Ratings
Futures: S&P 500 -0.0% DOW -0.8% NASDAQ -1.0%

Bernanke says Fed may taper QE later this year
• Gold drops over $80 | European stocks slump | Oil prices struggle
• ‘Sopranos’ star James Gandolfini dies | HSBC: China factories slowing

Got tapering?

June 20, 2013, 6:27 a.m. EDT
U.S. Treasurys slide, 10-year yield above 2.4%
By Sara Sjolin

LONDON (MarketWatch) — U.S. Treasurys dropped during European trading hours on Thursday, sending the yield on 10-year notes (10_YEAR +3.17%) to the highest level since August 2011. The yield rose 9 basis points to 2.448%, marking the first time above the 2.4% level since October 2011, according to data from FactSet. The weakness in U.S. Treasurys added to a selloff from Wednesday when Federal Reserve Chairman Ben Bernanke said the central bank could begin tapering its asset purchases later this year if data come in in line with forecasts. Among other maturities on Thursday, the yield on 5-year notes (5_YEAR +5.31%) rose 8 basis points to 1.33% and the 30-year bond yield (30_YEAR +2.31%) climbed 10 basis points to 3.51%.

Bernanke and China send world stocks lower
By CNNMoney Staff @CNNMoneyInvest
June 20, 2013: 6:24 AM ET
NEW YORK (CNNMoney)

Investors may be in for a Bernanke hangover on Thursday.

U.S. stock futures were weaker across the board ahead of the opening bell. S&P and Nasdaq futures were down about 1% and Dow futures fell 0.7%.

And world stock markets were deeply in the red as investors took fright at plans by the Federal Reserve to begin reducing the pace of stimulus toward the end of this year.

A weak reading on China’s factories further rattled investors as it stoked concerns about slowing growth in the world’s second biggest economy.

Stocks tumbled Wednesday after Fed chairman Ben Bernanke said the central bank could slow the pace of its bond-buying program later this year if the economy continues to improve.
…

June 20, 2013, 6:05 a.m. ET
Singapore Dollar Lower Late on Fed Tapering Talk

SINGAPORE–The Singapore dollar was lower against the U.S. dollar on Thursday as traders piled into the U.S. unit after Federal Reserve Chairman Ben Bernanke pointed to a tapering of bond buying toward the end of the year.

The U.S. dollar was at S$1.2741 late in Asia from S$1.2565 the same time on Wednesday.
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Latest Change
USD/SGD 1.2750 +1.8500
Overnight Rate 0.05% Unchanged
2-Year Bond Yield 0.37% +8 bps
10-Year Bond Yield 2.37% +26 bps
2-Year Swap Offer 0.71% +10 bps
10-Year Swap Offer 2.52% +41 bps
2-10-Year Swap Curve 181 bps +7 bps

Federal Reserve
Bernanke Says Little, Market Plummets: Welcome to the Post-QE Economy
By Rana Foroohar
June 20, 2013

Federal Reserve Chairman Ben Bernanke speaks during a news conference in Washington, D.C., on June 19, 2013.
Follow @TIMEBusiness

What a strange world we are living in when Ben Bernanke holds a press conference to say that he’s essentially going to do nothing, and the markets go down 200 points. That was the story last night after the Fed announced it would hold steady on quantitative easing for at least the next several months, watching and waiting to make sure the U.S. economy really is strong enough for the central bank to pull back from the $85 billion money dump it’s been doing every month. This “tapering” is different from interest rate tightening, which probably won’t happen before 2015. Yet mortgage rates have gone up, too, because of worries that the era of easy money is over.

So why the strong market reaction to news that was basically ho-hum?
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They have to pay their debts in dollars?

$71.00 an OZ …oh my

Gold under $1300/oz and still falling…wow! It’s enough to take your breath away…

The ones who should be the most glum are the home buyers. Stocks and bonds are drifting lower as well. The biggest drop in gold prices are behind us. Smart investors are selling stocks and shifting into asset class that most people overlook. It is beginning to look like 2000 again.

Gold = $1300/oz OR BUST.

DJIA = 15K OR BUST.

At $1,300, gold is now down 30% from its peak. And all investors who finally bought into the gold mania over the past couple of years are now underwater.”

Gold was the bubble not housing not yet at least

Bubbles pop if they don’t pop it’s not a bubble

treasuries next ?

Bill is stealing from the gold bugs by doing his continual, and planned, dollar cost averaging. He may, eventually, emerge victorious.

I DCA Small Cap, Large Cap, Health and International. Plus large acquisitions of BRK/B.

Worked well this year. Up 10 to 24% until the 10% correction. Fine with us -

Do the new owners summarily qualify for legal protection against foreclosure under the California Homeowner’s Bill of Rights?

“In that 23 minutes of truthiness is a theme about buying a McMansion in California with a NINJA loan and the absurdity of trying to live in it. It captures the idiocy of Bubble 1.0 very well- including the part where the happy new owners never even make their first payment.“

+1 Gotta love those “First Payment Default” peeps. So California!

It was neat to see one of my favorite cancelled shows resurrected on Netflix after seven years. It makes sense that the show tackled the Housing Bubble/Bust as the family owned a housing development company. The new season explored the character’s post-cancellation lives.

http://www.washingtonpost.com/blogs/wonkblog/wp/2013/05/27/how-arrested-development-explains-the-housing-crisis-among-other-things/

Now’s the Time to Start Worrying About Mortgage Rates
by Matt Koppenheffer, The Motley Fool
Jun 19th 2013 8:35PM
Updated Jun 20th 2013 12:50AM

The Federal Reserve didn’t tip its cards on raising interest rates. At least, not in its prepared post-meeting statement. The message continues to be that a “highly accommodative stance of monetary policy” will remain in place until unemployment dips below 6.5% or inflation expectations start tipping above 2.5%. It’s the same heavy dose of non-clear clarity that’s been driving markets crazy for some time now.

But if you’re a potential home buyer who’s had a close eye on mortgage rates, or an investor in mortgage- and interest-rate sensitive businesses like banks and mortgage REITs, there’s plenty that the Fed has offered that hints at timing.

If we look to the supplemental release of the Fed’s economic projections, we can see the “central tendency” projection for unemployment has come down for both 2013 and 2014.
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“How will mortgage rates fare in a post-QE3 world?”

Really depends on whose money is at risk. That said, I wouldn’t invest my retirement nest-egg for the promise of a 20% return to put Nadya Suleman and her litter into a California home. The only winners would be the MBA and NAR commission junkies.

20 June 2013 Last updated at 05:41 ET
Linda Yueh
A cash crunch in China, the Fed, and Abenomics
Japanese and Chinese banknotes

The morning after the night before: Last night, the Fed suggested the beginning of the end of their cheap cash injections, while the Japanese prime minister confirmed that Abenomics is in full swing.

Then, there’s China. Its banks are charging the most on record to lend to each other by one key measure.

It costs 12.3% for banks to lend to each other for seven days. In other words, China is sort-of experiencing a credit crunch, which is fairly surprising as its banks are largely state-owned.

But, they are also suffering the consequences of too much cheap cash, and now there are signs of the beginning of the end of that era.

End date
…

12 June 2013 Last updated at 10:00 ET
Linda Yueh
The great reversal? Is the era of cheap money ending?

A Bangalore street market The Indian rupee fell to a record low this week

It was US bonds last week, and now it’s emerging economies’ currencies, stocks and bonds that aren’t having a good week.

A key index of emerging market stocks has fallen by 10% since its May peak. Brazil’s stock market is down by more than 20%, which is often called a bear market.

The money outflows are clearly seen in their currencies. The Indian rupee fell to a record low earlier this week. The Brazilian and South African currencies hit four year lows and are at the level that they were during the global financial crisis. The Indonesian currency hit its lowest level in three years.

For that matter, US government bonds haven’t been doing well either. Investors reportedly sold a record amount of global bonds last week, where two-thirds were US bonds. They also sold emerging market bonds.

What’s the connection? A nervousness over the potential end of cheap money.
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Maybe it’s a fork in the road poking us in the butt?

“Is a major turning point now staring us in the face, or is there a way back out of the abyss?”

Maybe Obama’s trusted financial confident Jon Corzine will part the sea of debt, Moses style, and lead the gluttonous Americans to the land of milk and honey.

Emotion is a major factor. The sheeple have been conditioned that they are “buying a home”, not borrowing from a bank to pay hundreds of thousands of dollars of interest for a used house that is nothing more than a depreciating asset.

Look at asking prices of resale housing.

- They’re still priced 200%-300% higher than pre-bubble levels

-Asking prices of resale housing are 40% higher than the cost to build (material, labor, profit)

Why would you pay a 40% premium for a used up 30 year old house?

The largest housing mania in history may not be quite dead yet, but the credit expansion that fueled it is crumbling. The consequences are natural, logical and unavoidable, but they will be totally unexpected. Remain defensive as long as these gaping vulnerabilities persist.

Most people cannot analyze their situation past their next paycheck.

Do I come here, because I like interacting with smart people that understand the crazy financial times that we are living in?

Or do I come here to get reinforcement of my preconceived notions about housing?

I try to take that into consideration. All I know for sure is that I know a lot more now than when I first came here, and that can’t be bad.

Maybe they can keep things afloat for another 10 years and I look like a tin hat person.

It depends on your definition of “afloat”. They can keep things from cratering for a long time. That said, it won’t be pretty, with a steadily eroding standard of living and other ugly side effects. At some point the house of cards will collapse.

Year-over-year and month-over-month, housing inventory is actually increasing in Phoenix and Las Vegas. And this after steep inventory declines over the past year. I think the next crash should come very quickly.

That’s an understatement.

That’s what bankruptcy’s for….

Polly

I had trouble getting more than just two comments - although 15 were listed as posted.

Any advice?

Just out of curiosity - why are you posting about your investment in a penny Canadian stock here?

Years ago I used to invest in individual stocks. Now I stick to (mostly index) mutual funds and ETFs.

Back in the day it seemed like there was a lot of pumping and dumping cheer leading on Silicon Investor. Until you mentioned it today, I had not thought about the Silicon Investor website in well over 5 years, maybe longer.

Excellent New Yorker piece discussing that topic in the Bay Area and Silly Valley:

http://m.newyorker.com/reporting/2013/05/27/130527fa_fact_packer

After Manhattan, New York’s upper-middle classes are being priced out of Brooklyn. Sassen diagnoses “gradual destruction.”

That’s odd, since real estate only goes down in value.

I see this happening on a smaller scale in smaller cities. It’s “cool” to live downtown if you’re rich now, even in Flyover.

We wouldn’t need gated communities if the “youths” of the world behaved themselves.

Well it’s all part of a global phenomenon that threatens to turn the world’s top cities into “gated citadels,” British author Simon Kuper warns in the Financial Times.

As someone noted earlier, fences work both ways.

I think there are too downtown many condos for only 1% of people to live there. When I was a kid, downtown was a place for drug addicts. No one wanted to live there.

With amnesty / open borders now fully implemented, these dis-satisfied youths can just come to America, register as Democrats and live the good life. And as my liberal betters keep telling me, the USA will be much stronger through our diversity and such.

On Monday, I was visited by a couple of friends who were bringing their car, Blue, home after a long drive. In the latter half of 2011, they started out from Seattle. Destination: Tierre de Fuego and then Antarctica.

After communing with the icebergs and penguins, they drove north to Sao Paolo, put the car on a ship and sent it up to Galveston. They flew home to Seattle and took care of a few other things, then went to Texas to be reunited with their beloved Blue.

Their impressions of Central and South America? Mexico is one of the most happening countries around. Great food. Nice people. A lot of fun to be had there.

Central America? Sort of like North Korea in that the people are slowly becoming smaller and dumber because of widespread malnutrition. The smart ones left for El Norte.

South America lacked good beer. But that Chilean wine is out of this world. Brazil? Look out for country. It’s on the move.

Realtor®

Getting a sincere statement from a Realtor is like trying to nail jello to a tree.

Second best. Stocks are #1 on my list.

New York Markets Open in: 0:23:39
Pre-Market Indications | Analyst Ratings

Futures: S&P 500 -0.9% DOW -0.7% NASDAQ -0.9%
Jobless claims rise more sharply than expected
• Gut checks: Another triple-digit-swing day in stocks is coming up
• Reeves: Uncomfortable QE truths | Gross: Wrong read on Bernanke
• Stock futures slide | Gold plunges 6% | 10-year Treasurys at 2.4%

Is the situation at hand a mini-panic which has almost run its course, or the start of another long-hot summer which has only just begun?

ft dot com
Last updated: June 20, 2013 11:19 pm
Global sell-off raises turbulence fears
By Ralph Atkins in London and Michael Mackenzie in New York

An abrupt global sell-off in equities, bonds and commodities on Thursday has fuelled fears that the world is entering a fresh phase of financial turbulence as the US Federal Reserve prepares to ease its large-scale asset purchases.

Emerging markets were among the worst hit in volatile trading after Ben Bernanke, Fed chairman, on Wednesday set out the case for slowing the pace of QE3 this year as the US economy picks up momentum. As the dollar strengthened, gold prices tumbled by as much as 4.8 per cent to a two-and-a-half-year low. Oil fell 3.3 per cent.

Yields on 10-year US Treasuries, which move inversely with prices, hit 2.47 per cent at one point – up from a low of 1.61 per cent in early May – although a steep fall in US equity prices later encouraged a move back into government debt.

Thursday’s sell-off threw firmly into reverse the rally earlier this year triggered by Japan’s aggressive action to drag its economy out of deflation.

“The mood was exuberant in May after the Bank of Japan started to print money but with the Fed heading the other way everyone is suddenly very twitchy,” said Trevor Greetham, director of asset allocation at Fidelity.

John Brady, managing director of interest rate sales at RJ O’Brien, said: “The risk here is that the market’s reaction is now out of the Fed’s hands – emerging market and carry trades globally are being unwound.”

The nervousness was exacerbated by an escalating credit crunch in China, where short-term money rates soared to all-time highs. The FTSE Emerging markets index tumbled 4.2 per cent on Thursday – the deepest one-day slide since September 2011. The EMBI Global Diversified index of international developing country bonds fell 1.4 per cent to its lowest level since June last year and has lost almost 8 per cent since early May. The Indian rupee and Turkish lira plunged to record lows against the dollar.

“Risk assets are very vulnerable, and the situation in China is not positive for near-term global growth prospects,” said John Briggs, strategist at RBS Securities.
…

ft dot com
Last updated: June 20, 2013 11:19 pm
Global sell-off raises turbulence fears
By Ralph Atkins in London and Michael Mackenzie in New York

An abrupt global sell-off in equities, bonds and commodities on Thursday has fuelled fears that the world is entering a fresh phase of financial turbulence as the US Federal Reserve prepares to ease its large-scale asset purchases.

Emerging markets were among the worst hit in volatile trading after Ben Bernanke, Fed chairman, on Wednesday set out the case for slowing the pace of QE3 this year as the US economy picks up momentum. As the dollar strengthened, gold prices tumbled by as much as 4.8 per cent to a two-and-a-half-year low. Oil fell 3.3 per cent.

Yields on 10-year US Treasuries, which move inversely with prices, hit 2.47 per cent at one point – up from a low of 1.61 per cent in early May – although a steep fall in US equity prices later encouraged a move back into government debt.

Thursday’s sell-off threw firmly into reverse the rally earlier this year triggered by Japan’s aggressive action to drag its economy out of deflation.

“The mood was exuberant in May after the Bank of Japan started to print money but with the Fed heading the other way everyone is suddenly very twitchy,” said Trevor Greetham, director of asset allocation at Fidelity.

John Brady, managing director of interest rate sales at RJ O’Brien, said: “The risk here is that the market’s reaction is now out of the Fed’s hands – emerging market and carry trades globally are being unwound.”

The nervousness was exacerbated by an escalating credit crunch in China, where short-term money rates soared to all-time highs. The FTSE Emerging markets index tumbled 4.2 per cent on Thursday – the deepest one-day slide since September 2011. The EMBI Global Diversified index of international developing country bonds fell 1.4 per cent to its lowest level since June last year and has lost almost 8 per cent since early May. The Indian rupee and Turkish lira plunged to record lows against the dollar.

“Risk assets are very vulnerable, and the situation in China is not positive for near-term global growth prospects,” said John Briggs, strategist at RBS Securities.
…

Even better than that:
” The House Appropriations Subcommittee voted Monday to cut renewable energy spending at DOE in half - by $911 million - in fiscal 2014 (not counting 8.7% cuts in the current sequester), ostensibly to cope with a second round of automatic sequestration cuts.
Since they want to raise defense spending $28 billion above the sequester level they are looking for cuts elsewhere.
“In a challenging fiscal environment, we have to prioritize funding, and the Subcommittee chose to address the readiness and safety of the nation’s nuclear stockpile and to invest in critical infrastructure projects to protect lives and property and support economic growth,” says Energy and Water Subcommittee Chairman Rodney Frelinghuysen (R-NJ).
Nuclear security would be funded at $11.3 billion - $661 million above the sequester level - while renewable energy would get less than $1 billion next year.
They also want to steep cuts in one of DOE’s flagship programs, ARPA-E, which funds breakthrough energy research by slashing spending on the Department of Energy’s (DOE’s) Advanced Research Projects Agency-Energy (ARPA-E) from the current level of $252 million to just $50 million, an 80% cut.”
http://www.sustainablebusiness.com/index.cfm/go/news.display/id/24988

The GOP thinks we need more nuclear bombs? Really?

Let them eat cake!

medicated population. And people wonder why we don’t see more protests in the US.

Wait, I thought health care was so expensive people were getting sick and dying because they couldn’t afford care. But now 70% are taking medication? So they’re too poor to afford the out of control drug prices yet everyone’s taking drugs, they can’t afford.

So they must be stealing the drugs?

it’s always about the money.

Yeah, but does that include people who are prescribed an antibiotic, take the dose, then are done?

And that’s AFTER Prilosec went OTC. That was one of the most prescribed drugs in America.

Now if you’ll excuse me, I think I need to talk to my doctor about C!al*s.

Analysis courtesy of ZeroHedge:
http://www.zerohedge.com/news/2013-06-20/what-recent-surge-rates-means-your-home-purchasing-power

…”So in one month, the average 30 year fixed rate mortgage has jumped by over 60 basis points. What does this mean for net purchasing power? Well, as the chart below shows, assuming a $2000/month budget to be spent on amortizing a mortgage (or otherwise spent for rent), it means that suddenly instead of being able to afford a $425K house, the average consumer can buy a $395K house.

This means that, all else equal, housing just sustained a 7% drop in the average equlibrium price based on what buyers can afford.

But assuming the current selloff in rates continues, things are going to get much worse: we may be seeing 5%, 5.5% even 6% and higher mortgages in the immediate future.

It also means that a buyer who could previously afford a $506K house with a $2,000 monthly budget at an interest rate of 2.5% will be able to afford only $316K if and when the average 30 Year fixed hits 6.5%: a 40% drop in affordability based on just a 4% increase in interest rates!”

What’s the difference amongst junkies, debtors and donkeys?

Yes. His point was was that the Fed was deflating the dollar, causing asset and equity prices to rise, and with the change (ie. QE infinity ending at some point), you see a reversal in those trends to some extent…asset and equity prices falling, and dollar reflating (somewhat).

Markets extend slide over Fed concerns, poor economic news from China
By Katerina Sokou, Updated: Thursday, June 20, 3:42 PM

The stock market plummeted on Thursday, posting its biggest one-day drop since 2011, rocked by investor concern that the Federal Reserve is getting closer to pulling back on its stimulus program and by poor economic news from China.

The Standard & Poor’s 500 Index tumbled 1,588 points, closing down 2.5 percent, its worst drop since November 2011. The benchmark index’s two-day loss was the biggest since November 2012, at 3.9 percent. The Dow Jones Industrial Average erased nearly 354 points, closing down 2.3 percent.

Equities and demand for government bonds continued to fall a day after the Federal Reserve said that it may begin phasing out its policy of buying $85 billion a month in bonds to grow the economy as early as September. Fed Chairman Ben Bernanke also indicated in a news conference Wednesday that the central bank could decide to end the stimulus program in mid-2014

The interest rate of 10-year U.S. Treasuries rose to a 22-month high of 2.47 percent, the the highest since Aug. 8, 2011, according to Bloomberg Bond Trader prices. The 30-year bond yield rose above 3.5 percent for the first time since September 2011, reaching 3.53 percent.
…
Katerina Sokou 4:39 PM ET
More business news

Existing-home sales, prices continue to surge

May figures are latest reflection of renewed strength in the housing market.

This is why global markets are freaking out
By Neil Irwin and Katerina Sokou, Published: June 20, 2013 at 7:30 pm
Around the world, markets were frazzled by the latest out of the Fed. (Kin Cheung/AP)

A wave of selling washed across the financial world Thursday, driving the stock market down, interest rates up, and bringing new tremors of concern that the forces that have been propping up growth are starting to fade away.

The U.S. stock market closed Thursday down 2.5 percent following a 1.4 percent drop on Wednesday, but those moderate declines don’t capture the sense of fear that captured trading floors from Wall Street to London to Tokyo this week. The very underpinnings of a four-year bull market seemed to be coming unglued. An index of expected future market volatility soared 23 percent, to its highest level since the fiscal cliff standoff at the end of last year.

Markets are spooked, interest rates are on the rise across the globe, and a manufacturing survey hinted at new economic weakness in China. If those trends continue it could be enough to take the air out of a U.S. economic recovery that was just gaining momentum.

This isn’t a crisis like the ones that struck the United States starting in 2008 or Europe in 2010. Rather, it is a byproduct of the world’s central banks, having intervened on vast scale to deal with the economic travails of the last several years, introducing uncertainty and even a little chaos as they start to contemplate how and when the era of easy money might end.
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The financial market freakout, in five charts
By Neil Irwin, Published: June 20, 2013 at 11:21 am

Ben Bernanke and the Federal Reserve laid out a relatively clear vision of the future path of their policies Wednesday afternoon. Markets didn’t — and still don’t — like it one bit. Here’s the damage, in chart form.

The immediate trigger of the sell-off, which includes a 2.1 percent drop in the Standard & Poor’s 500 index as of about 3:00 p.m., was in part due to heightened expectations that the Fed will taper its $85 billion a month program of bond purchases starting this year and end it perhaps next summer. Another factor was a weak reading on the Chinese factory sector, which raised the prospect that the world’s second-largest economy could be slowing.

Here are five charts that show how different markets are being affected.

House Rejects Farm Bill as Food Stamp Cuts Prove Divisive
By RON NIXON
Published: June 20, 2013 12 Comments

WASHINGTON — The surprise defeat of the farm bill in the House on Thursday underscored the ideological divide between the more conservative, antispending Republican lawmakers and their leadership, who failed to garner sufficient votes from their caucus as well as from Democrats.

The vote against the bill, 234 to 195, comes a year after House leaders pulled the measure off the calendar because conservative lawmakers demanded deeper cuts in the food stamp program and Democrats objected. This year’s measure called for more significant cuts than the Senate bill, but it still did not go far enough to get a majority in the House to support an overhaul of the nation’s food and farm programs. Sixty-two Republicans, or more than a quarter of the caucus, voted with Democrats to defeat the bill.

The failure was a stinging defeat for Speaker John A. Boehner of Ohio, who continues to have trouble marshaling the Republican support he needs to pass major legislation. Without the solid backing of his party, Mr. Boehner has to rely on some Democratic support, which deserted him Thursday.
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I noticed we haven’t heard any comments from RAL about rents decreasing lately. Maybe that’s why.

I bought a new fridge and new washer/dryer a couple of years ago. $4300 all in with tax. Store had a 0% for 12 months offer. I took it. Paid it off 1/12 of the total every month. A little while after that, same thing with new carpet. In this case it was 0.9% for 18 months. Took that offer as well.

You’d have to be a financial dolt to pay cash when you can finance for practically 0% (or in many cases actually 0%). This goes for cars, furniture, appliances, you name it.

Does anyone have any repo statistics on all those cash for clunker new cars?

Got wicked fast investor paradigm shift which nobody could have seen coming!?

ft dot com
June 20, 2013 4:35 pm
Fasten your seat belts for a turbulent QE exit
By Gillian Tett
Investors will be forced to shift mindsets and portfolios

A few weeks ago I had the pleasure of dining with two former luminaries of American economic policy. Unsurprisingly, the issue of quantitative easing provoked heated debate – not so much over the question of whether QE had been a correct policy to implement (they both backed its introduction), but whether the Federal Reserve could ever find a smooth exit.

The argument was illuminating, since it split along two lines. One of the dinner guests – who I shall call “Mr O”, or Optimist – argued that it was entirely possible for the Federal Reserve to achieve a smooth exit from QE. After all, he declared, the Fed did not necessarily need to actively do anything to find that exit, such as sell securities; instead, it merely needed to stop buying anything more. For if it duly sat on its hands, the two trillion-dollars worth of assets it has recently accumulated on its balance sheet would automatically roll off (ie come to maturity), enabling the Fed balance sheet to return to pre-crisis levels over the course of the next seven or eight years.

Or to use a memorable image, what the Fed is essentially now doing – in the eyes of Mr O – is akin to a pilot stealthily landing a plane: once it powers down the motors, gravity will take hold, putting the balance sheet on a steady downward glide path. “There will be plenty of time to adjust, and even if it’s a bit bumpy sometimes, that can be handled,” Mr O insisted. After all, Ben Bernanke, Fed chairman, has already told everyone well ahead of time to start fastening their seat belts to avoid any element of surprise. Hence this week’s statements.

So far, so reassuring, at least as an image. But there is catch. As we sat around the dinner table that night, another former Washington luminary – who I shall called Mr P, or Pessimist – was distinctly unconvinced. For Mr P’s own experience of sitting on the flight deck of America’s economy leaves him dubious about whether policy makers can ever deliver such smooth glide paths, particularly over seven years.

Never mind the fact that the proposed glide path, between now and 2021, say, would cut across two American election cycles (or four if you count the mid-terms too); and ignore the potential for geopolitical shocks (say Iran, North Korea or from the eurozone). Another risk is that other central banks could also be seeking their own descent paths at the same time as the Fed, creating additional turbulence. After all, G7 central banks have collectively put some $10,000bn of additional liquidity into the system since 2008, according to JPMorgan and Deutsche estimates. That means that there has been an unprecedented level of simultaneous monetary stimulus – and prospective future tightening.
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