Bond Outlook January 28th

As often mentioned in this Weekly, we see this recession as “L” shaped, by which we mean that GDP, still falling, will eventually reach a bottom and then stay there for years, not just months. The reason for this gloomy, but realistic expectation is that households in the USA and elsewhere will take many years to repair their “balance sheets”; they will not be ready to spend beyond their means for all this time. David Rosenberg of Merrill Lynch supports this scenario, but lays down three benchmarks for recovery. The following is our summary of the views he presented in Geneva recently:

• This recession is not cyclical but secular, i.e. a major shift has taken place in economic growth, expansion cannot return by the traditional process of inventory adjustment
• The loss of household wealth is about USD 3 trillion, and this means that households will have to save for years to achieve acceptable levels of indebtedness
• Even then, the US consumer may not pull the economy out of the recession; maybe his Chinese counterpart will!
• No recovery can happen until house prices stop declining
• The three benchmarks for recovery in the USA are:

1.