Bond Outlook November 11 2009

We chose the expression “L-shaped” to describe the current recession many months ago. The term is now acquiring near-official status if comments by various members of the Fed are to be believed, (although “L-shaped recovery” is almost a contradiction in terms). Politicians, of course, speak a different language, still promising a “V” shaped recovery. Geithner claims that a second stimulus package is not necessary but that “a recovery that’s going to work is led by private demand”. At first sight it looks like he is calling for increased household spending - the very thing which is impossible because of increased saving and the end of borrowing by refinancing. However, we go along with him if “private” also encompasses a renewed focus by industry (à la Sachs) on exports, education and “green” technology.

Another term we have used many times is “impasse”. For the moment US policy is heading further into this impasse, by applying as “remedies” the same cheap money and fiscal stimuli which caused the crisis in the first place. The way out lies partly with these restructuring ideas, and partly with the acceptance of a lower standard of living, as the USD weakens and household spending slows still further.