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Bond Outlook May 21st

Against a background of unrelenting bad economic news, we consider the looming dangers of the world’s largest unregulated insurance and financial market: credit default swaps.

Bond Outlook [by bridport & cie, May 21st 2008]

Rarely have so many disruptions and disquieting trends hit the world economy simultaneously. Accordingly, it is difficult to understand the relative calm of financial markets:

  • The credit crisis is entering its second phase with the liquidity problems more or less solved but the full impact of the credit squeeze still to come
  • The world is rapidly running out of cheap oil, while new, expensive oil and alternatives are not yet on stream
  • The demand for oil and food from the Asian developing economies is growing hugely
  • Switching agriculture to ethanol production has exacerbated the food shortage
  • The dangers of a Mideast flare up are increasing
  • The data on inflation is misleading
  • The US economy is in recession

We do not intend this week to go through these various assertions, but rather to use them as a backdrop to a particular problem which we see as a major component of the second phase of the credit crisis: credit default swaps (CDSs).

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