Bond Outlook [by bridport & cie, November 18th 2009]
| If there is an inviolate rule in economics, it is that cheap money always leads to inflation, not necessarily be expressed through a rise in consumer prices, but to inflation of something, such as financial assets, commodities or property. When consumer price inflation is low for structural reasons such as rising unemployment and/or household decisions to save more, funds look for any home that provides a chance of a positive return. Whether such asset inflation can be described as a bubble is debateable, but the dominant characteristic of bubbles is that they always burst. |
| Bubbles can of course continue expanding for longer than we might think, and whilst we believe conditions in low-credit bonds are representative of a bubble environment, it is difficult to forecast the likely bursting point whilst liquidity remains so abundant. |
| Once “bubble analysis” could be considered in the context of the US economy alone. However, now that the economic recovery is so intertwined with global rebalancing, bubbles can be found outside the USA. Since the recovery is being led by Asia in general, and China in particular, it can scarcely be surprising that bubbles may be found in China or countries associated with its growth. |