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Bond Outlook July 22 2009

Talk of an exit strategy seems premature when the whole process of rebalancing, led as it is by China resurgence, will take so long, and the US fundamentals out right.

Bond Outlook [by bridport & cie, July 22nd 2009]

An exit strategy? Wait a minute: the exit is still a long way off. When Bernanke speaks of low interest rates indefinitely into the future, he is supporting our long-held view that, for the USA at least, this recession is L-shaped, with a very long base. The US economy is on artificial life support: cheap funds, de facto government guarantees, printing money, nationalisation of the mortgage industry etc. None of this is sustainable, and it all seems an extreme case of the past policies of the Fed: as soon as the financial markets falter, throw cheap money at the economy. Put off once again the fateful day of reckoning.

“Exit” in the sense of a return to the status quo ante is not possible for the USA. All that can be achieved is a steady economy at a few percent down on the pre-crisis GDP for some years. During that time households will be repairing their balance sheets, imports will be down, exports also, but not so much, as the weak dollar reinforces competitiveness.

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