The fed was very accommodative, and we started to build a housing bubble which we burst in 2008, and now i think arguably in 2013 we may have created or at least started to create another equity bubble that in some areas, perhaps many some real estate markets, is also turning into a bubble. New york city, toronto, we were talking about this at lunch, other urban centers, especially those attractive to foreign buyers are seeing very rapid increases whereas in more rural areas thats not happening. So how do we, how do we respond to this, and what does this tell us about the future . One of the things thats emerged here is that the financial and real estate markets have in the United States and perhaps elsewhere have developed a kind of uncomfortable codependence with the central bank. That is, if markets, especially lets say equity markets in the last several years, are very resilient in the face of threats. We saw this in recent weeks where all the armwringing, handwringing and talk about were going to default, were going to default, the markets were pretty calm about it, in fact, downright calm. And the minute there was a settlement, stock prices rallied to levels above where they had been a month ago and nobody thought a month and a half ago, nobody thought we were going to either shut the government down or have a debt ceiling crisis. And i think part of the reason is, again, this codependence, that the prospect of a problem that might cause problems for vehicles of wealth accumulation like the equity market and or real estate markets just doesnt bother most investors now because they continue to be pretty convinced that there is a fed put out there, that is that the fed wont let anything bad happen. And its really hard to gauge, but what part of the level of equity markets and recovery in some of the real estate markets that have been chronicled here are dependent in a sense on the fed put, on the notion that theres not a lot of risk in terms of accumulating assets and that the fed will be there to rescue. That theme of a fed put experienced a bit of a wrinkle over the past quarter. You all recall that prior to the fiscal crisis in the u. S. Analysts could talk about nothing but the feds decision to taper that chairman bernanke hinted at in may, that was a virtual certainty just before the feds, i think, september 17th meeting. And then the fed decided not to taper. And they, you know, they observed a couple of things. They observed in the written statement that you can easily look up on the feds web site and or chairman bernankes press conference one of the concerns was that Interest Rates had gone up over 100 basis points, and so that the affordability of housing had been sharply reduced. You know, some people were rather calm about it, but, you know, a move in Interest Rates from 3 to 4 , i think, on a typical mortgage i think i did the math, lets say a 250,000 mortgage, youre looking at a couple hundred dollars a month. For many households thats a problem. So here was the fed thinking about i think ending some of the codependence in a pre post bernanke world to use the title here [laughter] and i think wishing they could get out of this qe circle theyre in and wishing they could get away from it. Theres a lot of dissension on the fomc about it. People just, you know, and probably theyre taking a lot of heat, and its probably not doing a lot of good. Its very controversial, difficult to do simulation experiments on the effect of qe because there isnt a lot of we only have a few years of data. But its clear that, you know, if we look at average growth rates for the past four or five years, were, what, about 1. 9 in the u. S. With inflation drifting lower. So to whatever extent printing money to buy government bonds and mortgagebacked securities has been undertaken, it hasnt really lit the economy on fire. Partly because the demand for cash remains quite high in a world of a lot of policy uncertainty and event risk. And Companies Hold a lot of cash, individuals hold a lot of cash. Partly, probably two basic reasons. One is the optionality that cash gives you, and so Companies Like that if things go badly and opportunities arise. If youve got cash, thats good. And then in a sense youre selfinsuring if youre a Large Corporation and you can afford to do that, then thats an attractive idea. So against this background and just to put things in perspective, i went back and looked at the net worth of households and nonprofit organizations which is, what, the real net worth which is what the theory of the fed maintains just to try to scale the housing collapse, housing bubble collapse. And it turns out that in the year before, essentially, leading up to the trough which would have been around the end of 2008, households lost 20 of their net worth. Which is substantial. Needless to say. And efforts to recover have been reasonably successful. I think now if we look at real wealth per capita in the u. S. As measured by the fed which is probably as good a measure as any, the recovery has been to about 92 of pre2007 levels which is good, but i think most american households have developed the notion that they ought to be getting a little bit better off every year, and to have gone seven years without reattaining the old level of net worth is, obviously, problematic. The result, the observable result there are two observable results. One, in terms of consumption if you look at a cyclicallyadjusted consumption pattern, and the chart is in one of the papers here on the wealth accumulation, consumption in recoverys very weak. And this is a macro number. Obviously, some people are doing very well, others not. But if you look at it on a macro basis, consumption is running way behind a typical postwar expansion on the order of over a standard deviation below the typical point at which we find consumption this far into a recovery. Remember, the recovery began in this june of 2009 according to the nber, and its probably a reasonable enough date. Things got so bad that they started to look a lot better by the middle of 2009. And now i think so that puts us into the and here im just giving you a little bit of macro background we are in month 54 of this recovery. So another thing thats happening here as we move further and further past the crisis is that the lock the clock is running. We are having a recovery. Its a tepid recovery, and its actually starting to reach the average length of recovery in postwar u. S. A typical postwar recovery in the u. S and this is with a somewhat Proactive Central Bank lasts 58 months. So one of the problems that we face here as were raising questions about how the central bank, how aggressive the central bank can be in supporting real estate values and equity values, we have, you know, experts in the field suggesting that there may be some signs of overly stretched valuations, and the role played by investors and cash buyers in the market, the dominant role played by investors and cash buyers in the market probably the data suggests is getting less pronounced partly because the investors have pretty much driven up the prices of the units they want to rent out, financing costs are a little higher, and so, you know, that seems to be that portion of the real estate recovery which is really not a matter of everybodys feeling better and willing to spend more on a house, its really a matter of investors saying, gee, if i bought, well, you know, what, i think blackstone bought huge portfolios of existing real estate and rented it out, securitized it. You know, theyre already gone from the game. Meanwhile, the flow demand that that creates is gone from the market. So the pattern will be fairly familiar, that if the bounce in the housing sector needs more support, the feds in a somewhat difficult position because they have pretty much offered as much support as they can, they have indicated this year in the Second Quarter that they were a little bit easy about the major instrument theyre using which is quantitative easing and which entails, i guess, who had the picture of the feds Balance Sheet . Important to look at. You know, the fed owns a lot of treasuries, and they own a tremendous portion of the mortgage market. And they have to, they have to hold it at least. And, of course, the problem i think that alex pointed out is, yes, they may not sell any of it, but when they stop buying it and thats what tapering is all about that may be a problem. And so were kind of, you know, i think i go back to the theme that a number of the panelists have suggested, that is we may be sort of in the as good as it gets stage of this modest bounce in the real estate sector. And the equity market i, you know, ill leave it to, ill leave it to the equity experts. Certainly, the valuations based on bob shillers yardstick are adequate to slightly high. So its not as if the stock market is a screaming bargain. So again, five years plus into the postbubble period weve thrown a great deal at at least getting wealth back to where it was, and were almost there. The vehicles have been the equity market, the asset markets, the equity market and the real estate market. And the implied can codependence has become more and more obvious, underlined, of course, by the feds recent experiment with abandoning tapering and, of course, when they meet, lets see, a couple weeks, theyll have to revisit that issue. But im expecting they wont want to go anywhere near a discussion of changing their tapering policy at this point because its just so sensitive. So Going Forward into the postbernanke fed what should and you have one to two minutes. I cant believe i never run out of time. [laughter] all right, quick, two things of janet yellen. Janet yellen, i think, does need to give a big speech after shes installed as fed chairman, and she needs to this is not a forecast, im just saying under current circumstances she needs to establish at least two points. One and very basic, i dont think anybody would disagree, fed cant do everything. And certainly, theyve been asked to do a great deal. And they cant do everything. And so shes going to have to somewhat lower expectations about what the fed can do. And then secondly, im very up comfortable and uncomfortable and i guess janet reinforced this, with the feds commitment to keep Interest Rates low until the Unemployment Rate goes could be to 6. 5 or lower. The problem i have with that is that theres really not a, theres no empirical relationship between Interest Rates and the Unemployment Rate. And its not clear that the fed can produce a longrun effect on the rate of unemployment. So theyre in this awkward position of having made a commitment that may not be fulfilled, and yet theyll be politically held to continue to try to reach the goal without being able to do so. Lastly, disinflation continues both in europe, were seeing actually more disinflation. Theres an interesting piece in the ft today. U. S. And japan is struggling to overcome it. Hasnt got there yet. So have Monetary Policy fading and then, of course, fiscal policy is being consolidated in most places and most aggressively in the United States, notwithstanding the fiasco weve seen for the past several weeks. So five years on i think this post bubble recovery is getting a little long in the tooth, and the role that Central Banks are playing in it is becoming problematic, and so janet yellen has a lot of challenges. Ill leave it there. Thank you, john. All right, i want to give each member of the panel one to two minutes, two minutes max, to either respond to anything anybody else said or add something or clarify something. Jay . Just wanted to make a couple points to emphasize what john finished saying and what chris said is that when you look at the efficacy of the feds actions, what is the actual benefit in terms of Unemployment Rate of tapering. As opposed to what are the problems with withdrawing the taper. So in other words, we cant see that its necessarily doing that much good in place, but we know what the pain is of withdrawing it. Its sort of reminding me of that old joke of coming upon somebody hitting themself in the head with a hammer and saying why are you doing that and the answer is, well, because it hurts too much when i stop. I guess i think back to some of these sports things and in workouts they say no pain, no gain, are we really supposed to be in a painless society, or should we accept the fact that breaking circle of codependency with the fed is going to cause some pain in terms of either a reversal of some of the personal wealth gains, some of that weve seen. So i think that is really the policy issue at the moment as opposed to, as john said, do we really expect a further decrease in Unemployment Rates because of continuing tapering. Mark . Thank you. Jay, i just wanted to ask you a question. Youre the numbers guy. Do you remember when the last time we had a market where both refies and purchases were gaining in the same year . Not off the top of my head. Certainly before the bubble, right . Sometime in the 90s, do you think . Early 2000s . I dont know myself, im just spitballing here, that sounds about right. And, chris, i just wanted to ask you a question, this might be too obvious, but you talked about the factors that discourage lending, you didnt mention the cfpb, are they going to discourage lending as well . Well, i would say the cfpb is probably the single biggest obstacle to americans getting loans today. If the intent of doddfrank was to protect consumers, its protecting them from getting a loan. Thats really the bottom line. [laughter] mark . Thats all . Yeah. Okay. Thank you. Good questions. Desmond . I guess id take a somewhat different view on quantitative easing in that i think one cant say that quantitative easing hasnt been effective because it hasnt got the economy to grow very rapidly. I think ones really got to look at what the counterfactual would have been, that without quantitative easing, we could very well held back into recession. And i would have thought that if quantitative easing brought down Interest Rates particularly at the long end to the kind of levels that we saw and it boosted asset prices, i would have thought that quantitative easing would have had some effect at maybe the problem was that there wasnt enough quantitative easing. Chris . Yeah. I wanted to pick up on a very important point john made thats already been mentioned which is that theres no empirical connection between Interest Rates and jobs. You know, one of the central fallacies of the feds policy mandate going back many, many years is this notion that they can manage both employment and stable pricing. Up until really the bernanke year at the fed the what was called the taylor rule which, essentially, posited a tradeoff between inflation and jobs was the operative model. But thats now been thrown out the window. So today, again to repeat, if you talk to people at the fed about why they are doing what they are doing, they cannot offer you a rational, intellectual construct. There is none. And, indeed, if you look at whats happened in every one of the Asset Classes that have been discussed today, you do see bubbles. You even see Institutional Investors running around buying family homes to, essentially, run them as rental properties for mid to low singledigit yields if you do everything right. My firm is one of the biggest managers of rental properties in the country, and were very good at it, but its a very tough business. Its a business that you really dont quantity to see a lot of leverage dont want to see a lot of leverage underneath. So its not to say you cant make money running rental properties, but the fed that is managed to convince wall street that this is something they should put a lot of money into. And i think when you look at the third world and other Asset Classes that have been affected, even the bond market, by quantitative e easing, you have to ask yourself is this a good thing. And my answer would be, no. I think were living in an anomaly, and when policy does change, its going to be an extremely painful process for consumers and others. Last point, inflation. Does anyone in this room think the cost of living is going down . I think the feds already hit the inflation target, and today need to admit it. Thank you. Thank you all. During chris comments we should have put your last slide up again. Mark . John. Quick response to two points. Quantitative easing, i should have distinguished between marginal and average impact. Certainly, quantitative easing has had a support i impact on the supportive impact on the economy and had it not even been attempted, i expect we would have been having slower growth. Im really thinking about if janet yellen lets suppose the economy slows down for whatever reason. Is qe4 going to do as much as qe3 and qe2 . Im concerned its not, so im really concerned about the diminishing marginal impact. The bubbles question, i guess i should add to her speech i think janet needs to be very clear that the fed will be watching asset prices on both sides; that is, if there appears to be a bubble, they will take that into account. That is a very delicate discussion. Its sort of the inverse of chairman greenspans 1999 testimony where he said we cant identify a bubble, and were not going to try, and everybody said thats great. Here we go. But i think given the presence of bubbles, alternating bubbles in the stock market and the real estate markets, the fed really does have to Pay Attention to that. And very, they have to be explace sit that theyre explicit that theyre watching it, and they have to be sure that in reacting to a market response like some of the problems weve had in the past that theyre not really just inflating a bubble further. So that becomes a big channel. A big challenge. I think a bigger challenge, janet yellen takes over at a time when the feds mutuals have probably been pretty much used up, and in some cases are gunning to be beginning to be counterproductive. Thank you. Before we open the floor to your questions, i see the first question is back there, but before we get there i wanted to say that inspired by johns focus on the aggregate inflationadjusted wealth of american households, we just looked at the series of numbers again, a nice 60year history. And it turns out that a the trend line through this history is unsurprising. Its approximately the average growth rate