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Bond Outlook March 14th

Cracks in the sub-prime mortgage market have turned into crevasses, and cracks are appearing all over the housing loan business. First reaction of the authorities? Mutual blame!

Bond Outlook [by bridport & cie, March 14th 2007]

The pause in the market correction did not last very long. In fact, for equity markets, this is looking remarkably like a “dead cat bounce”.


We have long held that the dominant issue facing the US economy was the end of the housing bubble. The JPY carry trade is also important, but a secondary issue while the housing market works through its problems. We had supposed a simple linkage between mortgage equity withdrawal (“mewing”) and consumer spending:


  • US households spend more than they earn
  • most of their borrowing is against increased home equity
  • house prices have stopped climbing
  • ergo, mewing must cease
  • spending must decline
  • GDP, so dependent on retail consumption, must also decline
  • additional consequences include a weaker USD and an improved balance of trade


We envisaged this as an essentially middle-class phenomenon, in that the cracks would first appear in the spending capacity of financially solid households.

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