Bond Outlook [by bridport & cie, March 26th 2008]
The same big three basic causes, an economy built on financial deficits, falling house prices and excess leverage remain unaddressed by all the manoeuvring of the Fed. Very clever manoeuvring it is, and necessary to avoid collapse, but only time and belt tightening can resolve the big three.
It is now possible to outline the unfolding of the big three's impacts in a number of areas:
If all this sounds like "the end of an era", maybe it is precisely that. If there is one consistent theme in this Weekly over the nearly ten years of current authorship, it is that the USA's profligacy cannot last in consuming far more of the world's output than it delivers. This current crisis looks remarkably like the end of the road.
While some investors are seeing the stock market bounce last week as a sign of the crisis ending. Both the above considerations and our own experience trading in the bond markets suggest a large degree of wishful thinking.
(+) Fed: FRB of NY is creating a Delaware-based "Resolution Trust Mark II", echoing the takeover of the Savings and Loans banks in the 1980s. It will have $30 billion of poisoned assets. Blackrock are running it
(?) US housing: sales of existing houses have picked up, while new sales and prices have fallen. Lower prices and foreclosures may explain the bargain hunting
(!) Commodities: a mixed week with some up (cereals), some down (coffee, petroleum, silver, gold)
(!) Iceland: a further increase in the overnight rate by 125bps has lifted the rate to 15%, allowing the exchange rate to gain 4% after losing 23%
() New York: a loss of 20,000 finance related jobs expected as Wall street profitability falls 80%
(!) Credit losses: Goldman Sachs write of USD 1.2 billion overall, with 40% in USA, and announced financial institutions losses are about half way through (similar but larger to what we recently wrote in this Weekly)
(+) positive for bonds () negative for bonds (!) watch out (?) begs a question
Recommended average maturity for bonds.
Stay long maturities in USD and EUR. Quite short in CHF and GBP.
|As of 09.01.08||2018||2010||2018||2011|
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|Dr. Roy Damary|