Those who attended LOM’s market update luncheon at the Hamilton Princess last week may recall our thesis that the US is one of the few major economic powers capable of pulling the world out of its present slump.As the ‘cleanest dirty shirt’ in the global laundry bin, most economists are carefully watching US policy and looking for clues about whether America can successfully build a bi-partisan bridge across the so-called ‘fiscal cliff’. Impending uncertainty about a raft of potentially crippling American tax hikes is already causing businesses to pull back on capital spending plans.Like a deer caught in the headlights of an oncoming car, businesses big and small are generally halting new investment while waiting on what might be a completely new set of rules next year as the US counts down the last few days before the presidential election on November 6.Even as the world’s largest economy digests the potential impact of America’s looming fiscal austerity programme, the S&P 500 is still up by about 12 percent since the beginning of the year. Until the beginning of this month the stock market had been flirting with new four- and five-year highs, pumped up on steroids with another massive dose of quantitative easing, or ‘QE3’. But in recent days investors have begun to waver.Uncertainly is never constructive for risk markets and, front and centre, we are now faced with many challenges in both Europe and the US rising to a crescendo in the few short months before year-end. In recent days, earnings misses by some of the world’s largest companies including IBM, General Electric and Caterpillar confirm the broad-based pullback in business spending on capital goods and technology.Yet all is not lost at the moment, however! Amid the gloom and doom on the corporate earnings front, many parts of the housing and consumer-related sectors are actually experiencing a renaissance. In fact, the US residential real estate market appears to be undergoing somewhat of a mini-boom.Even as many of America’s largest corporations are falling short of earnings, homebuilders are reporting record profits and backlogs across the board. For example, Lennar Corp, one of the country’s largest builders reported earnings which far exceeded analysts’ expectations on revenue growth of 34 percent and announced a 44 percent increase in its building backlog. Other related industries including regional banks also appear to be riding the wave.This year’s improvement in the housing sector recalls the old saying “Don’t fight the Fed.” The age old Wall Street axiom suggests that investors not make bets against any class of assets when the US Federal Reserve is attempting to invoke policy - i.e. throwing money in that direction.Remember, ‘QE3’ was the Fed’s mandated commitment to purchase $40 billion in mortgage securities directly in the markets - for a very long time. Buying mortgages is the government’s latest initiative to push mortgage rates lower and thereby entice buyers back into the housing market. As of this writing, the interest rate on a 30-year mortgage in America is about 3.4 percent, very close to its all-time low reached in 1971.By many different metrics, housing has snapped back faster than many economists had expected. Last week, the Commerce Department reported that housing starts had surged by another 15 percent to the highest level in four years. In terms of inventories, as of the end of September US homes in foreclosure have fallen to just 180,000, about half the record number of 367,000 reported in March of 2010.As homes are steadily purchased and foreclosures worked through the banking system, inventories of available homes for sale have declined. At the end of September home inventories had declined to 2.32 million units, far below the glut of houses on the market during the depths of the Great Recession when inventories were well over 3.5 million. Industry analysts have embraced the better news: “The numbers are strong in September, and that is definitely a positive sign,” said Celia Chen, a housing economist with Moody’s Analytics. “It is confirmation that housing is lifting off the bottom.”In addition to the immediate impact of better profits for home builders, some strategists have noted a “multiplier effect” on an improved housing environment. For one thing, consumers have lately benefitted from feeling more financially secure. Now that the median home price has increased by over 20 percent since the beginning of the year, home owners are feeling more confident about the value of perhaps their most important asset. In fact, the bump up in home values combined with a 12 percent increase in stock prices this year may be contributing to the modest uptick in consumer spending seen recently. US automobile sales for example hit a three-year high of 15 million annualised vehicles last month. And importantly, an improvement in housing has the potential to create another two million jobs by some estimates.From a global macro-economic perspective, a true recovery in American housing cannot be underestimated. Effectively, the Great Recession was instigated by excessive leverage, speculation in real estate and badly managed risk. Because the recession was caused by a real estate bust, it makes sense that the recovery may be led by an improvement in the same sector. Furthermore, the performance of real estate and related industries is integral to the global banking system. Lending to both residential and commercial real estate projects is a universal cornerstone of banking systems everywhere.In terms of playing the real estate rebound for profits, several avenues are available. The LOM Fixed Income Fund and Stable Income Fund have been heavily weighted in the banking sector and financial obligations for some time, effectively participating in the gradual improvement in the industry’s credit quality. Other sector bets would be direct equity investments in building materials companies, retailers targeting household goods and banks leveraged to residential properties in those markets expected to see more of a comeback. Many of our funds also participate in Real Estate Investment Trusts (REIT’s).Going forward, investors would be wise to carefully monitor the progress of the macroeconomic environment to ensure that the American government can effectively bridge the fiscal cliff and that some sense of order continues to be maintained within the troubled euro zone. Moreover, several times over the past few years, economists have prematurely declared an end to the housing bust only to see the data fall off sharply again.On the global macroeconomic front, it is critical that the US avoid the steep economic pullbacks typically concurrent with fiscal austerity such as that recently witnessed in the UK and peripheral Europe. Also, markets are likely to see greater volatility in the months ahead regardless of policy. Housing in particular is prone to significant price gyrations due to seasonality, weather conditions and changing political and economic developments in specific areas within the country.Bryan Dooley, CFA is a senior portfolio and fund manager at LOM Asset Management Ltd in Bermuda specialising in the areas of mutual fund portfolio management and quantitative process. Please contact LOM at 441-292-5000 for further informationThis communication is for information purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. Readers should consult with their Brokers if such information and or opinions would be in their best interest when making investment decisions. LOM is licensed to conduct investment business by the Bermuda Monetary Authority.