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Are we living in an economic oasis in Switzerland? While all around, economies are slowing, house prices falling, consumer prices rising, Switzerland is enjoying low unemployment and inflation, and steady expansion. In many ways the country is bursting at the seams, with multi-nationals moving into “Romandie”, and German nationals moving into the Zurich area. There is an acute shortage of housing. When last time (beginning end 1989) housing prices collapsed elsewhere in Europe, Switzerland went through the same thing, but this time things look different (always a dangerous utterance!). Even the UBS’s position at the head of the list of banks losing money from sub-prime is being calmly absorbed by the Swiss finance industry. The Federal Banking Commission is now imposing higher bank capital requirements to ensure better protection in the future. Chemicals, watches, machine building and tourism, plus the presence of so many international headquarters, are keeping the current account positive and the CHF solid without being too strong. |
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Opening the labour market to citizens of the European Union is a major cause both of the economic expansion and the housing shortage. There must be lessons from the Swiss economic success about prudent economic management and strict control of indebtedness. Yet there is every reason to beware hubris and to be conscious that the massive change now underway in the world’s economy can scarcely leave anyone unscathed, although our colleagues in Jersey see themselves as much an exception as Switzerland! |
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We have been diligently searching for positive news about the rest of the world, but without much success. The fall in commodity prices is encouraging, but itself reflects a slowing of demand. The best way to see commodity prices is that they too have been through a bubble, and its deflation suggests that the shift of oil and other raw material consumption from the West to Asia is well advanced and may be slowing as a new equilibrium is reached. The lower USD has certainly helped US exports and is all part of the economic rebalancing witnessed since the beginning of this decade. |
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Recent strengthening of the USD seems to be based on the concept that the USA has lowered interest rates faster and will therefore recover more quickly than other countries. While totally admitting that the trend is now much in favour of the USD, we find this argument spurious. We remind readers that behind the sub-prime crisis lay the availability of cheap money, allowing an economic expansion based on indebtedness. We, stubbornly perhaps, still believe that administering as treatment the very thing that caused the problem in the first place, can only postpone a long-term solution. |
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The question “for how long the USA can increase its international indebtedness?” is asked regularly. So far the answer has always been “longer than anyone could have expected”. The UBS, who should know something about debt, answers as follows, “… the supply of international savings to the States is over. The ability for the U.S. to postpone the day of reckoning by continuing to grow its pile of debt, would appear to have ended, at least for the time being.” The main evidence of this is the reduction in Treasury and GSE bond purchases from abroad in favour of selling US foreign assets and seeking equity capital from Sovereign Wealth Funds or there equivalent, like the Korean Development Bank possibly rescuing Lehman Brothers. |
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It is curious how several US hedge funds are reporting huge losses and some are even closing down, while, overall, hedge funds are said to hold very large cash reserves, which could yet be diverted to bailing out the banking industry. |
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Every US bank is curtailing it lending. The GSEs are on artificial life support. The CDS market remains unregulated, opaque and vulnerable. US consumers must retrench; when they can no longer borrow, what else can they do? We stand by our recommendations on long maturities, solid industrial corporate debt, and selected emerging markets in domestic currencies. |
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Focus |
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(+) Switzerland: GDP increased 0.4% in Q2 and by 2.3% on the year, owing to household consumption (+0.6% vs. Q1) and international trade. Inflation has declined slightly to 2.9% yoy in August vs. 3.1% in July |
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(–) France: growth forecasts lowered from 2% to 1.7% for this year |
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(+) Bond markets: the BIS sees the bond market as having stabilised, in contrast to the money market. Issuance in Q2 reached USD 1,100 billion versus USD 371 billion in Q1 |
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(–) Spain: unemployment at highest for 10 years at 11%. Some analysts see unemployment reaching 15% next year |
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(+) Denmark: GDP growth of 0.6% in Q2 after a contraction of 0.8% in Q1 |
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(+) Romania: record rise in GDP, at 8.8% in first half 2008 |
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(+) positive for bonds (–) negative for bonds (!) watch out (?) begs the question |
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