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Now that the Federal Reserve is disconnecting the heart-lung machine, it will be interesting to see if the economy can survive on its own. For five years now the Fed money machine (QE 1-2-3) has literally been the lifeblood of the economy.

Ironically, it is this very same policy of quantitative easing that is largely responsible for the upward redistribution of income in our society bemoaned by the current administration. Our easy money/tight credit environment has resulted in a scarcity of borrowers and a plethora of asset bubbles. With the S&P currently trading at a cyclically adjusted price earnings ratio of 24, it’s not cheap.

In my opinion, the equity market at this moment does not reflect the “real” economy, but instead is the product of central bank machinations. This is true both here and abroad. Central bankers the world over are printing money like mad to support/revive moribund economies. They are flogging a group of donkeys as if they were racehorses.

Why that should concern investors is simple. Historically, the average return for investors holding equities is 6 percent per annum. Now the great thing about having any usable measure of value is that it is “mean reverting.” This means it has to spend some time below its mean as well as above it. Thanks to Bernanke Inc., our market simply hasn’t done that. This suggests that from this level, someone who bought and held a broad basket of stocks for the next 15 years could expect roughly a 2-2½ percent real return.

So, thanks to the Fed’s machinations, investors may be looking at very poor future returns. Even then, this is not likely to be a smooth ride. There could be some very tough years mixed in with that 2 percent return. If I am right, and the stock market is another bubble in the making, it will end badly.

This will likely be exacerbated by downward pressure in the housing market. This is not something much noticed or commented on by the media or investment community, but it’s there nonetheless. The 10-year Treasury note’s yield almost doubled in 2013 (from 1.7 percent to nearly 3 percent). And over the last 18 months, the 30-year Treasury bond’s yield jumped more than 50 percent. So much for the Fed’s illusion of control.

These rates are already hurting new mortgage applications, which fell 15 percent last summer. After a brief respite, they’re sliding again. This “interest rate problem” for housing isn’t going away.

Furthermore, where are the rising incomes necessary to support this “recovery” in housing prices? Incomes were flat for the first decade of the new century, taking a real nosedive after the financial meltdown. When housing prices rise without a corresponding increase in incomes, it is the clearest sign possible of a new bubble.

This artifice was made possible earlier by the easy credit policies mandated by our “oh so wise” government. In deference to political correctness, someone who could fog a mirror could buy a house. This allowed consumers to pay ever higher prices for homes without corresponding wage increases.

However, those days are dead and gone. Banks across the board have tightened credit standards. It now takes an average FICO credit score of 732 for a bank to approve a loan. Compare this to the “go-go” days of housing when applicants with scores under 600 were approved regularly.

As sound as these reasons are, tighter credit standards are certainly not good for housing prices.

Finally, there’s the institutional component, or more specifically its looming exit. According to Goldman Sachs, almost 60 percent of home sales in the first quarter of 2013 were cash (read institutional) transactions vs. 19 percent in 2005. This means first-time homebuyers (the most important brick in the wall) are still locked out of the market.

The problem is that many of these same institutional investors find it a lot easier to buy homes with all of “Helicopter” Ben Bernanke’s funny money than lease or flip them to someone else. It was recently reported that American Homes 4 Rent (AMH), after going public and buying homes all over the U.S., had nearly half its homes sitting vacant as of June 2013. Oops!

The Carlyle Group, a private equity firm with $2.3 billion in real estate holding (and home to several past presidents) is actively reducing its multifamily holding. Just like with the stock market, rising interest rates, languishing incomes and tight credit means an indefinite rise in prices just isn’t in the cards. Cash is looking better all the time. With the largest sovereign wealth fund in the world, the Norwegian krone is probably a safe bet. As the best-run city state on planet Earth in addition to being the most business friendly, Singapore and its dollar also beckon. Bon voyage.

Robert Smith is president of Peregrine Private Capital Corp., based in Lake Oswego. Contact him at 503-241-4949 or at www.peregrineprivatecapital.com.