Bond Outlook [by bridport & cie, March 22nd 2006]
| Can anything new be drawn out of Bernanke’s recent comments? About the only thing we can see is that he recognises the importance of long-term yields and is shifting attention to 10-years, stating that the Fed will lift the short-end enough to drag the long-end up with it. He is totally anodyne about the forthcoming end of the housing bubble, seeing price declines as inevitable but moderate. We disagree, of course, as the end of mortgage equity withdrawal, now firmly underway, implies anything between a 1% reduction of GDP growth (Freddie Mac estimates) to 3% (a Greenspan estimate at the end of last year). Of all the data now available, the most striking for us is the new record high of the inventory of unsold houses. The bubble is indeed deflating. That cannot yet be said for the current high valuations of the US stock markets, but if both stock and house prices deflate together, problems will indeed be severe. |
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| The USA is now playing out a change in its fortunes linked to past excesses. |