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Bond Outlook July 1 2009

Moving from overpriced government bonds to quality corporates, our recommendation last October, is now commonplace. The Madoff scandal has very negative implications for New York and for hedge funds.

Bond Outlook [by bridport & cie, July 1st 2009]

Our weekly comments often include an historic perspective: the USA and other Western economies consume too much, whilst Asian countries, particularly China, produce too much and consume too little. For years we have pleaded in favour of a rebalancing via adjustment of both sides of this imbalance, this process being assisted by a strengthening of the RMB and its cohorts, which are at present being kept artificially weak. The development of a third major trading and reserve currency centred on China’s would be a natural component of the tri-polar world that we have long foreseen.

Such rebalancing is happening, and indeed, is accelerating. China has begun advocating a new reserve currency and is beginning to back these plans with action by, for example, building gold reserves. However, the Chinese still have the enormous problem of USD reserves in such quantities that they can and must contribute to a controlled decline in the USD to limit their losses. This may explain their continued purchases of US Treasuries (see Focus).

Of still greater significance, however, is the expansion of consumer spending in most Asian countries except South Korea, Hong Kong and Singapore (which have all more or less embraced the Western economic paradigm).

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