Bubble, Bubble & Years of Trouble, Economic & Fixed Income Market Outlook 2010

TCW

Tad Rivelle

December 26, 2009

Our general economic and market outlook has not materially changed over the course of the last several quarters. The de-leveraging that we have experienced has, of course, been the most severe experienced in the post-WWII period. We believe that the causative factors which brought about the intensity of the de-leveraging lay in the two asset bubbles the U.S. economy experienced over the course of the ten years preceding 2007.

Our view has been that the combination of the equity and housing bubbles was to bring about an "illusion of wealth" effect in the minds of many millions of economic actors. As a "for instance," imagine the situtation of a "typical" equity investor circa 1999: He openes his brokerage statement and understandably (but correctly) concludes that he is wealthy beyond his wildest dreams. Consequently, he ceases saving for college and for his retirement and alters his consumption/savings mix in the direction of elevated consumption. The economy booms until, ultimately, the illusion - and the dream - dies, as it did when the equity bubble popped.

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