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Bond Outlook March 18th

Optimism after Bernanke’s speech and higher housing starts is probably overdone. The banks’ problems are not yet fixed and underlying causes of the recession will take years to clear.

Bond Outlook [by bridport & cie, March 18th 2009]

Moderation in all things, including the optimism that we have expressed in recent Weeklies! It is encouraging to see housing starts increase in the USA, to hear of business optimism to edge upwards in Germany, to observe a stock market recovery and to read Bernanke’s assurance. However, from there to conclude that the crisis is over is to go too far too fast. The L-bend is still many months away.

At the risk of over-simplification, we link the bottoming out of the GDP (and the beginning of a long period of little or no growth) to the banking system being repaired. Admittedly, the bond market is fulfilling many of the roles of commercial banks, but for small and medium enterprises (which are the real source of economic growth), the absence of lending facilities is crippling. Geithner is about to take a further step cleaning up toxic bank assets, and this has to work for the L-bend to be reached.

Restoration of banking health is necessary to stop the GDP falling, but is not itself enough to return to GDP growth.

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