While Stephen Roach of MSI criticises Bernanke over “flip-flopping”, we find him quite consistent in quietly squeezing US borrowing till the housing bubble ends and credit expansion slows.

The flight to safety has eased but only temporarily, as the fundamental cause, drying up of liquidity, remains. With positive interest rats in Japan, the JPY must strengthen.

The flight to safety has now become a flight to extreme safety as even the BIS joins in the chorus asking for higher rates. Yet economic rebalancing remains on target.

Is this history we are watching? Central bankers are now collaborating in moves to rebalance the world economy, and a Fed Chairman who could care less about asset bubbles.

There is a lot underused capacity in the world and inflation at consumer level is moderate. Why then are central bankers acting in concert to dry up liquidity?

May 10th saw President Putin announce his wish for a fully convertible RUB on July 1st 2006 and in doing so pre-maturely capped a series of positive regulatory changes concerning Russia’s capital account. The liberalisation will impact various sections of the economy, and we see the domestic RUB bond market as the area most likely affected.

Amongst the current risk aversion, short-term opportunities may be arising in Brazil and Turkey, while emerging Asia may follow Russia’s lead in liberalisation of currency and financial markets.

Yesterday (a national holiday in Iceland) Standard & Poor's revised its outlook for the Republic of Iceland to negative from stable. According to the rating service the revision reflects the growing possibility of a hard landing for the countries credit and investment boom as economic imbalances start to unwind. At the same time S&P affirmed its long term AA- foreign and AA+ local and its short term A-1+ foreign and local currency sovereign credit ratings on the republic.

If stock markets are too volatile, the USD weak, interest rates rising and risk aversion rising everywhere, where can an investor turn his attention. Russia’s time may have come.

Market turbulence obscures underlying trends, which we again seek to identify. The shift in world economics with the rise of Asia and Russia has its parallels in politics.

The Chinese are doing a great job of managing the decline of the dollar. Be grateful, for only by letting the USA down gracefully can a tri-polar world be reached.

Two Governors, each accepting unpalatable events: Bernanke that inflation will come to the USA as the USD weakens; Trichet that the EUR may get stronger than industry would like.

USD weakening is no longer just in the hands of the Chinese. The US authorities, post G7, seem to have espoused devaluation as a route to rebalancing and debt reduction.

Bond Outlook [by bridport & cie, April 26th 2006]

Bond Outlook [by bridport & cie, April 19th 2006]

The US economic model is the greatest wheeze ever, or a disaster in the making. Which is your belief? And do ever-increasing bond yields affect your (and the market’s) answer?

As a speech by a minor parliamentarian shows, the currency of the greatest capitalist power is firmly in the hands of the world’s greatest nominally communist power. Interest rates, too.

Fixed-income markets and currencies are very shaky as the Fed rate approached 5% and may or may not reach its ceiling. This is a time to play safe.

The hands have been dealt and are being played out. The housing bubble is deflating; demand is picking up in Europe and Asia; rebalancing could yet happen just in time.

No need to wait for the Chinese to tire of supporting the dollar, US protectionism will soon be discouraging foreign investment anyway! Watch out for the USD and yields.

This has been week of two key changes, closely linked: long-term yields are at last rising and emerging markets are seeing a correction in bonds and stocks.

The buy back programmes of many emerging economies have narrowed spreads to where they scarcely match the risk. Domestic issues are an alternative, especially where currencies look strong.

Investors’ conclusions from flattening/inverting yield curves will differ for private, institutional and government buyers, and for issuers. Private investors have no reason to go long, but the others…

Continuing economic rebalancing has allowed many emerging and transition economies issue bonds in local currencies for international settlement. See our list for possible diversification.

The long T-Bond reappears just as the yield curve looks like inverting, and probably helping that effect. Inversion is probably a sign (but not the cause) of the coming slowdown.

Research from the Levy Institute spells out why the housing bubble must deflate and looks at the likely consequences. Only a repeat of an old warning, but worth taking seriously!

2006 is looking good and less dependent on the USA. However, the shift of the world's economy from unipolar to tripolar has serious implications for the cost of money.

THE ISK - A YEAR OF TWO HALVES [by bridport & cie, January 5th 2006]

Inherent sustainability or a recovery so dependent on debt that a major adjustment is overdue. How vulnerable everything is because the economy never followed a post-bubble cure five years ago.