Bond Outlook by bridport & cie, November 28 2012
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Bond Outlook by bridport & cie, November 28 2012

Sadly, our hopes that QE would be ended soon in the UK and USA have been dashed as both King and Bernanke say they are open to continuing their programmes

Barely a week has gone by, but our optimism that quantitative easing could soon cease has evaporated for both the UK and the USA. While the improvement in the housing market in the USA is excellent news, there are still many unresolved problems at the level of the US and world economy. First among these is the fiscal cliff in the USA. When Congress and the Administration finally make a deal – as surely they will – the economic “mood” will improve sharply.


It would improve even more if the problems of Europe (Greece, Spain, banking union, EU budget) were solved. The UK demand that the EU budget be frozen is but part of the two discordant visions of the Union: the UK’s free trade zone, and Germany’s federal super-state. Our guess is that the latter will prevail, but at the cost of a full or partial split. Indeed, press articles, not least from Germany, are focusing on why the UK should stay in the EU for the sake of the other members. These are quite historic times, with economics, politics, national sovereignty and democracy pulling in different directions, epitomised by the UK vs. German visions.


Is the austerity programme of various European governments working? According to The Economist, the answer is a tentative “yes”, except for Greece. Ireland has even gone off the radar screen, while the “PIGS” (now with only one “I”) are showing signs of improvement, be that at a high cost to the people. There is however an unwelcome shift in the focus of preoccupation, from the PIGS to France, “the time-bomb at the heart of Europe”, a perception highlighted by the Moody’s downgrade.


As the end of the year approaches, we allow ourselves to review two trends with longer-term implications. The first of these is the alleged emerging energy self-sufficiency of the USA. If fracking and shale oil achieve all that is promised by the energy companies then of course the whole world economy will undergo a huge change. It is a little puzzling that ecologists in the USA are so quiet (or have been muzzled). There are issues at stake which are better faced openly, as they seem to be in Europe, even if that slows development of the new technologies.


The second issue is education. To many observers, including ourselves, it has been a huge policy mistake to weaken technical or craft education in favour of “university degrees for everyone”. The countries which have best performed in recent years are precisely those where apprenticeships and trade schools have flourished: Germany and Switzerland. Only now are the USA, the UK and other countries waking up to the chronic shortage of technicians and craftsmen with a proper academic background to their manual skills. Thus a craft like welding now demands its own “STEM” knowledge (science, technology, engineering, maths).


A tragic side effect of producing too many college graduates and not enough technicians (in both the USA and UK) is that many graduates do not find jobs reflecting their education. Top jobs still exist, but middle-level positions are disappearing. Result: many graduates with huge loans to pay off are taking low-paid positions that will never let them get out of debt. We alerted readers to the US student loan bubble some months back, and the same problem is now looming in the UK. Moreover, it seems that in the USA student loans are “for ever”; unlike mortgages, personal bankruptcy does not remove the debt.


Our clients are following our recommendation to reduce risk as the high-yield market, both corporate and emerging, is going through a period of spread widening.

Macro Focus


United States


The effects of superstorm Sandy are appearing on macro data: retail sales fell by 0.3% in October and industrial production by 0.4%. Claims for unemployment insurance went up last week by 78,000 to 439,000.


The cost of living rose in October at the slowest pace in three months (+0.2% MoM). In the meantime, wholesale prices fell for the first time in five months as energy and vehicle costs dropped. (-0.2% MoM).


The average rate for a 30-year fixed mortgage declined to an all-time low of 3.34% from 3.4%: the average 15-year rate slipped to 2.65%,


Sales of previously owned U.S. homes climbed in October by 2.1% to a 4.79 million annual rate. Housing starts increased 3.6% to an annual rate of 894,000. Thus confidence among U.S. homebuilders rose in November to a six-year high.


Several members of the Fed support focusing on purchases of long-term bonds when the current programme ends.




The euro-area economy succumbed to a recession for the second time in four years. GDP slipped 0.1% in Q3 after a 0.2% decline in the previous quarter.


Euro-area exports declined 1.1 % from August, while imports dropped 2.7 %. The trade surplus widened to € 11.3 billion.


The euro-area jobless rate climbed to a record September.


Euro-area inflation slowed to 2.5% in October as energy costs moderated and austerity measures to tackle budget deficits hurt household spending and investment.


United Kingdom


While the unemployment rate declined to 7.8% in September, jobless claims rose at the fastest pace in more than a year and job creation slowed.


Retail sales fell more than forecast in October, by 0.8% from September, led by a decline in demand for food and clothing.




Investor confidence remained little changed in November. The Credit Suisse ZEW Expectation of Economic Growth index rose to minus 27.9 from minus 28.9 in October.


Exports declined 16.5% from September in October, snapping two months of advances. Imports declined 8.2%. As result, the trade surplus expanded to CHF 2.82 billion from 1.93 billion in September.



Dr. Roy Damary
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