Bond Outlook [by bridport & cie, October 11th 2006]
| A recent speech by Alan Greenspan gives us a further opportunity to disagree with him! He thinks that the worst of the housing-led slowdown is already over. He seems to be looking only at housing prices, while ignoring the impact of mortgage equity withdrawal (“mewing”). In fact mewing is still expanding, encouraged by a fall in 30-year mortgage rates, as long-term yields have fallen despite rises in the overnight rate. We would suppose the retired central banker sees this is as an almost unbroken continuation of the policy he was so proud to develop of encouraging households to spend more than they earn. |
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| For many years, commentators, including us, have said repeatedly that this cannot last. American households must eventually return to saving. Yet mewing has lasted longer than we could have envisaged. Now the question is whether it has returned to stay, or whether this is only a delay, much like turning the rudder on a super-tanker and having to wait a couple of miles before it has any effect. American house prices, even if they now fall by a few percent, still contain a lot of untapped equity. |