Bond Outlook May 28th

Often have we written of living through a historic change in the world’s economy. Two events this week epitomize that shift’s two main features:

• The relative decline of US economic dominance with consumers’ confidence reaching a 16-year low and house prices’ decline reckoned to be only half way to a total of 30% drop from the peak in 2006
• The end of cheap oil with the price per barrel reaching USD 135 and the media concentrating on its effects in the real economy

Fortunately it is not our responsibility to forecast stock market behaviour, but we cannot but wonder how a drop back in oil to USD 129 can provoke a stock market rally.

The two main events look coincidental. They are in reality closely intertwined. The Greenspan policy of using cheap money to avoid the impact of bursting bubbles – itself fundamentally irresponsible because the proper economic healing/adjustment has been disallowed – has led to ever greater irresponsibility, from deficit Federal finance to excessive household debt to a denial of risk.