Trahan on the Housing Bubble

When I cite stuff from Bear Stearns, I usually go for chief economist David Malpass. This week though, Fracois Trahan, Bear's chief strategist, weighs in on the housing market and the global implications of the Bubble. Trahan, whose job it is to plot optimal investment strategies is much less sanguine than Malpass, whose charge is simply to prognosticate on economic direction, I suppose.

Trahan's thesis is that the US real estate bubble burst will hit global stock markets hard through a chain reaction of consumer retractment, dropping the earnings of foreign firms send us our goods, leading to decreased global liquidity and lower stock markets.

A slowdown in the housing market would most likely have repercussions for the U.S. consumer, since housing wealth has been an important driver of this economic recovery... when the growth of homeowners' equity has slowed, so too has the rate of real consumer spending. Looking ahead... if housing slows, the consumer will likely slow as well... sooner or later, a slowdown in world trade weighs on global financial liquidity.

Contrast this with Malpass, who consistently downplays the gloom and doomers on the Bubble. Malpass' point is that the American consumer is marvelously wealthy and well positioned with locked in mortgage debt, but variable rates on savings to actually benefit from rising interest rates.

So why the seemingly contrasting Bubble takes coming from top guys at Bear? Well the answer lies in your preferred scope and scale. Trahan the Strategist is fundamentally addressing the question, Are stocks a good place to invest in the next 18 months? While Malpass the Economist tries to answer, What is the likely state of the US and global economy from here on out?

So I'm going to chalk up the union of analyses as my favorite scenario for how the Bubble plays itself out. Clearly we're at a housing demand crest. Any significant deflation of the Bubble has global equity market repercussions for what could be several years. But underlying economic health suggests long term strength, not some kind of Road Warrior apocalypse.