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Bond Outlook August 5 2009

For a few months we were more optimistic than financial markets. Now, however, we have take a tack different from theirs and introduce a large dose of scepticism.

Bond Outlook [by bridport & cie, August 5th 2009]

A couple of years ago at bridport we decided that it was worth maintaining our Weekly throughout the vacation period as significant developments often take place in August, despite (or perhaps because of) the relative thinness of markets. The last two Augusts have seen major crises begin; this August we may be seeing a major crisis resolved. Or are we?

Regular readers will not be surprised to see us return to a more sceptical mood after several months of hoping that GDP will stop falling by the end of the year, and that a rebalanced world economy will emerge with a shift of consumption from the USA and other Western countries to China and other emerging markets. That shift is taking place as the dollar weakens and domestic demand expands in China, albeit mainly because of massively increased infrastructure spending but eventually, we hope, via consumer spending.

The current optimism within financial markets is based on the old paradigm of a US economic recovery, but this is where we fall out of step.

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