U.S. housing remains gloomy. We believe U.S. policy is well behind the curve and will attempt to stem the self-reinforcing cycle of declining home prices and rising defaults, but will have little effect as affordability must return to pre-bubble levels.
Soft economic secular decoupling is being driven by rising local outside the U.S., changing trade dynamics and strong balance sheets in emerging market countries. Financial market decoupling will exhibit periods of high asset price correlation across various countries.
Exports from developing countries to industrialized countries have grown dramatically. Developing countries have increased foreign reserve holdings and established very large account surpluses. This has compressed real interest rates, inflation, risk premiums and volatility.
We believe inflation will rise, rooted in commodity markets, fiscal stimulus efforts and central banks' effective monetization of risks in the banking system.
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