|
A week truncated by various holidays has meant that bond markets have been operating at lower volumes with fewer new issues (not least because many have been pulled), for which liquidity has again been sufficient. Whether the reduction of liquidity, identified last week, returns will be seen over the coming days. In the meantime, apparently contradictory headlines "Foreign demand falls for Treasuries" and "Investors rush to quit junk bonds" imply a search for safety in the only place left: high-quality corporates. |
|
|
|
There has been a parallel pause in forex movements. A cynical view (like ours) is that the relative strength of the USD and the EUR depends on which of both troubled currencies is perceived to be the weaker. For the EUR, Greece is an enormous problem, far from resolved, while for the USD doubts about the recovery are re-emerging. Voices as respected as Rogoff's of Harvard and Hoenig's of the Kansas Fed are stressing that printing money inevitably leads to inflation and low growth. In parallel both MSI and economists from Dartmouth and Santa Cruz claim that only inflation can achieve a return to a normal ratio of Federal debt to GDP. MSI suggest 4-6%; readers might remember that we reckon 6% per year (Weekly of November 4th, 2009). |
|
|
|
In the light of the inherent long-term weakness of the USD and of the temporary (that needs questioning!) problems of the EUR, both commodity and emerging market currencies have strengthened. Yet, currently there are few places to hide from exchange risks, except perhaps precious metals. |
|
|
|
At the risk of boring readers, we repeat our view that the recession is L-shaped and that the Western economies are now embarked on a long horizontal leg of this "L". In the case of the USA, manufacturing and exports are not doing too badly. The problems are that the unemployment rate remains high, with little sign of recovery, the working week is short, and both consumer credit and spending are down. The squeeze on households is both inevitable and also desirable, as a renewed and sustainable expansion needs resolution of the fundamental economic problem of the USA and its consorts: spending beyond their means. Ironically the private sector is dealing with the problem, while governments are only exacerbating it. |
|
|
|
Are the banks a cause of the consumer cutback or a symptom? More the former, it seems, to judge from the loud complaints that loans to companies are unavailable, thus corporations are having to seek funds in the bond market and, according to data in The Economist, the cash holdings of banks are huge. The normal balance of deposit taking and lending has disappeared. Despite the low interest rates, consumers are saving and putting their money into banks (the reverse side of their deleveraging), while small and medium enterprises would like to borrow but cannot as the banks sit on the cash gathered from their depositors. |
|
|
|
Generally speaking, banking profits are also huge. As we wrote months ago, it would be quite difficult not be profitable when money is free or almost, and the Fed and the Treasury are happy to pay modest but positive interest. Too bad that banking ethics do not match their profitability. It may have been legal to assist Greece in its deception, but it was hardly ethical. While it is illegal to hide risk in promoting securities, intent has to be proven. It therefore looks like the banks involved in the Greek scam will again get away with it. |
|
|
|
Until a few issues are resolved we can but recommend quality and short maturities with a spattering of emerging and commodity markets in local currencies. |
|
|
|
Focus |
|
|
|
(?) USA: the trade deficit widened in December to USD 40 billion. The manufacturing index of the New York Fed improved to 24.91 for February, up from 15.92 in January. In spelling out the exit from quantitative easing, Bernanke insists that conditions will remain accommodating and that the move is only « normalisation » |
|
|
|
(-) UK: industrial production fell 3.6% yoy in December, while inflation is exceeding the 2% target (3.5% in January) |
|
|
|
(!) Canada: the trade deficit widened to CAD 246 million (!) in December, mainly because of vehicle imports. The Government is taking measures to dampen mortgage borrowing and consumer credit |
|
|
|
(+) Indonesia: the leading economy of South-East Asia achieved GDP growth of 4.5% in 2009 |
|
|
|
(+) Japan: wholesale prices fell 2.1% in January year on year, a slight slowing of deflation. GDP grew 1.1% yoy in Q4 |
|
|
|
(-) Spain: Q4 GDP fell 3.1% yoy |
|
|
|
(!) Switzerland: unemployment has risen to 4.5% |
|
|
|
(?) China: inflation was 1.5% yoy in January, down from 1.9% in December (why is China tightening with such low inflation? Could it be because of the housing bubble?) |
|
|
|
(+) Australia: job creation in January was 3 times higher that expected, allowing unemployment to fall to 5.3% |
|
|
|
(-) Hungary: industrial production fell 17.7% in 2009 |
|
|
|
(+) positive for bonds (-) negative for bonds (!) watch out (?) begs the question |
|
|
