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Bond Outlook April 13th

Politics is seriously damaging market forces as the means to world rebalancing, and now the protectionism raises it ugly head. Congress is developing a serious "bash-China" mood.

Bond Outlook [by bridport & cie, April 13th 2005]

Everyone agrees that the world economy is highly imbalanced, and that the current situation is unsustainable -- everyone, that is, except the financial markets, which are going through a phase we would liken to that of the last months of the bubble: everyone realised the party had to end, but no one wanted to leave too early. This week the US trade deficit was announced at record levels and the Fed confirmed that it would continue tightening at the same steady pace. Upon this the dollar strengthened, the stock market rose and the yield curve flattened!


Many commentators point out that the gap between the exports and the imports of the USA is so great that "mere" devaluation cannot solve the problem. The USA no longer produces enough goods and services of interest to other countries at almost any price. That is why the other feature of rebalancing must eventually come about: a reduction in US spending and an increase in savings. That translates into economic decline, and it is this inevitability that is not being faced.

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