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Bond Outlook August 27th

The peril in which the entire US financial system now stands, with many banks and the GSEs fitting the category of “the walking dead’, is growing from week to week.

Bond Outlook [by bridport & cie, August 27th 2008]

The glimmer of hope we pointed to last week -- that the US housing market should bottom out in the middle of 2009 -- remains credible with the increase in sales of existing houses, suggesting that lower prices are slowly but steadily working towards bringing supply and demand into balance. However, the total turnaround in US spending and savings habits that Merrill Lynch see as required for renewed economic health looks very elusive. Likewise, a return to health of the entire US financial sector seems even further away than a recovery in housing, which is not actually surprising since the credit crisis is the result of the housing crisis and cannot be resolved ahead of it.

The Federal Deposit Insurance Corporation (FDIC) has announced that its list of problem banks has grown over the last quarter from 90 to 117 (but never says which banks, presumably as that would be the kiss of death). It does however list the names of failed banks – and that list is growing by one a month.

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