Bond Outlook March 1st

A fortnight ago we were writing defensively about our bearish scenario for the US economy. This week we are seeing a return to the steady process we have been expecting for many months: a slowing in the housing market, a decline in consumer confidence and a drop in manufacturing indices, coupled with doubts about the valuation of Google and other internet stocks. However, we shall not fall into the trap of announcing that the tide has now turned, as there will be surely be many reversals in the declining outlook we have been painting. Remember the two major fault lines:

• the housing bubble and the end of “mewing” (mortgage equity withdrawal)
• the withdrawal of Asian support for the dollar (mainly China, but not only)

While we see the housing fault line as the first to crack, two elements are a reminder of the second:

• American resentment of foreign acquisition of US companies (“buy our T-bonds to let us spend more than we earn, but hands off our companies”).