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November 24th 2010

Weekly Comment Bond Outlook With so much disconcerting news, it comes as light relief that the USA has revised upwards its data on GDP and spending, causing broadcasters to proclaim that the country might be on the way to recovery. We hardly believe a word of it, on the grounds that none of the fundamental problems associated with the need to deleverage across the board and return to a stable housing market have been solved. Still, let us be grateful for small mercies! The politico-economic issues facing the world can be divided into their short-term and long-term problems: The Euro Zone: the problem of Ireland must be solved by an emergency bailout. ‘Must” because, in addition to the political unacceptability of failure of the single currency project, exposure to Irish bank debt is great enough to damage, if not bring down, banks throughout Europe: EUR 375 billion for commercial banks + EUR 130 billion for the ECB. That is without considering the risk of contagion to Portugal and others. The metaphorical need to fight fires in Greece and now Ireland reflects the built-in weakness of the EMU, viz. that poorly managed economies are tied to the same currency and to similar interest rates (until recently that is) as the bettermanaged economies of Northern Europe, led by Germany. This incompatibility can only be resolved in one of two ways: greater political union (anathema to the UK, but it is outside the euro zone anyway), or departure of the peripheral countries from the EMU. These are long-term issues that European leaders might now address as the current fires are damped down. The immediate problem of the USA is to prevent deflation and renewed recession, which is why Bernanke is so keen on QE2, and resistant to all criticism. The long-term issue is budget deficit elimination or living within one’s means at various levels. The short-term problem of China is to convert an export-based economy to one with greater home consumption, and that needs a stronger RMB. In the longer term Chinese economic management is not the great success that it is commonly believed to be. As reported by China watcher V. Katsenelson (thank you, John Mauldin), the Japanese building of “bridges to nowhere” has been trumped by China’s “shopping Malls for no one” and even “Cities for no one” (“Ordos” in Inner Mongolia). As the USSR and Comecon so well demonstrated, central planning cannot ensure real growth, and GDP growth based on useless production is unsustainable. Finally, just to keep us really cheerful we could worry about containing North Korea in its latest provocation while wondering what to do when that dictatorship eventually falls. Focus USA: Q3 GDP was revised 0.5% higher to 2.5%. Shares prices are moving independently of the bond market, a sign that profits and valuations are guiding investors more than concern about the economy Europe: a majority of nations in the EU oppose introducing a binding leverage ratio that was adopted last week by the Group of 20 countries Ireland: the rescue package for Ireland may amount to about EUR 85 billion. Moody’s says a “ multi-notch” downgrade in Ireland’s Aa2 credit rating is “most likely”. The government will soon publish its four-year plan and call an election after passing the country’s budget U.K: retail sales rose in October by 0.5% over September as consumers bought more sports gear and games and brought forward spending to avoid next year’s increase in value-added tax Switzerland: exports increased in October by 6.2% over September, fuelled by demand for metal-making and textiles machinery. However, investor confidence dropped to the lowest in more than 1 1/2 years in November China: the Government ordered banks to set aside larger reserves for the second time in two weeks, draining cash from the financial system to limit inflation and asset-bubble risks New Zealand: Standard & Poor’s lowered the country’s credit-rating outlook to negative on doubts about the credit quality of the banking sector Recommended average maturity for bonds (corporate/government) Extend the barbell in corporate bonds from EUR to include USD (cash/7years). GOVERNMENT Currency

USD

GBP

EUR

CORPORATE CHF

USD

GBP

EUR

CHF

17.11.2010

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barbell

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27.10.2010

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Dr Roy Damary

bridport & cie s.a.

http://www.bridport.ch/investorservices/research/Pdf/Weekly%20Comment%2020101124  

http://www.bridport.ch/investorservices/research/Pdf/Weekly%20Comment%2020101124.pdf

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