One of the main reasons we are forecasting minimal growth in consumer demand three years after the collapse of the real estate bubble is the number of households with mortgage debt that exceeds the value of their homes, i/e., negative equity. According to First American CoreLogic, "11 million, or 23 percent, of all residential properties with mortgages were in negative equity at the end of the second quarter of 2010, down from 11.2 million and 24 percent from the first quarter of 2010. Foreclosures, rather than meaningful price appreciation, were the primary driver in the change in negative equity." When home prices were rising, consumption was boosted by the 'feel good' wealth effect and by homeowners withdrawing equity from their homes in the form of credit lines. Now the economy is experiencing the reverse effect.

We believe home prices will remain depressed for several years due to excess supply, and would not be surprised to see prices fall modestly in the second half of the year.

David Fuller's view The US is experiencing house price disinflation. This is obviously a problem for those who are overleveraged and/or have lost their jobs. However it is neither an unprecedented event nor conformation of an economic depression, but it is a necessary prerequisite for an eventual return to economic stability.

Over 100 years of global economic history indicate that it takes approximately 5 to 7 years for an economy to recover from a credit crisis. Meanwhile, trends towards less private sector debt, better corporate governance, a less leveraged and more responsible banking sector, plus an increased awareness that manufacturing and exports are also important for the USA, are all positive for the long term.

The pain of economic downsizing, especially when some other countries avoided the 2008-2009 recession and are enjoying comparatively robust growth, has contributed to a loss of confidence for some investors. That is understandable but irrational pessimism today can be as mistaken as irrational exuberance during the formation of previous stock market or property bubbles.

For a reality check, look at the earning and relative performance of many western multinational companies leveraged to the global economy. Eoin and I have highlighted a number of these over the last few months, not least because they often have reasonable PERs and yields well in excess of Treasuries.