Bernanke’s Tape Worm: Can It Be Killed (Or Tapered) Without Pain?

Tomorrow, The Fed’s Open Market Committee (FOMC) meets to decide its strategy for monetary easing or tightening.

The question that has been talked about in the news is The Fed “tapering” its easing (better known as tightening).

There are some good reasons for The Fed to kill its tape worm (or begin tapering).

First, The Fed’s balance sheet has swollen to over $3.3 trillion, including Treasuries and Agency MBS. Now, THAT’S a big tapeworm!

Second, the duration (risk) of Agency MBS (such as the Fannie Mae 4% MBS) has increased dramatically over the past year from 1.0 to 5.1.

Third, the yield curve in the US (and Japan) has risen since May 2nd. Is The Fed losing control?

Fourth, M2 Money Velocity keeps falling since the money “printing” is holed up as reserves and not getting released into the economy.

With house prices recovering (primarily because of investors), The Fed’s killing of the tapeworm may be harmful.

Prediction? Bernanke hints at a taper tomorrow.

Housing Starts Rise 6.8% in May, Misses Expectation of 11.4%

According to the US Census Bureau, privately-owned housing starts in May were at a seasonally adjusted annual rate of 914,000. This is 6.8 percent above the revised April estimate of 856,000 and is 28.6 percent above the May 2012 rate of 711,000.

Single-family housing starts in May were at a rate of 599,000; this is 0.3 percent above the revised April figure of 597,000. The May rate for units in buildings with five units or more was 306,000.

While this is good news, the print of 6.8% was far below the expectation of 11.4%.

Privately-owned housing units authorized by building permits in May were at a seasonally adjusted annual rate of 974,000. This is 3.1 percent below the revised April rate of 1,005,000, but is 20.8 percent above the May 2012 estimate of 806,000.

Single-family authorizations in May were at a rate of 622,000; this is 1.3 percent above the revised April figure of 614,000. Authorizations of units in buildings with five units or more were at a rate of 374,000 in April.

The decline in MoM housing permits of -3.1% is close to the expected decline of -3.0%.

Now for the bad news. Housing starts are back to 1981 levels. So, I wouldn’t over blow the housing recovery quite yet.

Let’s see if the “recovery” continues if The Fed takes its foot off the monetary accelerator. Or bubble machine.

The US Treasury 10 year continues its steady march upwards since May 2nd.

I wonder if Dodd-Frank is contributing to the lack of recovery?