{"id":583,"date":"2012-07-31T06:20:06","date_gmt":"2012-07-31T06:20:06","guid":{"rendered":"http:\/\/www.thebizsense.com\/views\/?p=583"},"modified":"2012-07-31T06:20:06","modified_gmt":"2012-07-31T06:20:06","slug":"numb-the-pain-but-dont-cure","status":"publish","type":"post","link":"https:\/\/www.thebizsense.com\/views\/business\/numb-the-pain-but-dont-cure","title":{"rendered":"Numb the pain, but don’t cure"},"content":{"rendered":"
\"Euro<\/a>

Euro Currency<\/p><\/div>\n

The problems of the banking system won\u2019t be solved without radical reform, which is fiercely opposed by vested interests and their supportive political elites. Repeated doses of \u201cmorphine\u201d \u2013 easy credit \u2013 will be required to prevent financial explosions.<\/p>\n

The problem of sluggish economic growth won\u2019t be solved either, given policies that favour stasis rather than stimulus (or the most inefficient and therefore ineffective types of stimulus), and political resistance to radical restructuring. Again, the answer will be\u2026 more \u201cmorphine.\u201d<\/p>\n

The strongest sovereign bonds will remain one essential component of a low-risk portfolio for a long time to come. They will only become risky when central banks start raising interest rates in response to rising inflation. That will happen eventually, but now it\u2019s not even on the radar screen.<\/p>\n

Corporate bonds won\u2019t necessarily perform as well. Companies\u2019 creditworthiness is sensitive to the strength of their profits, and their balance sheets are leveraged. So when economies perform poorly, risk aversion rises, motivating investors to move out of higher-risk corporates into lowest-risk sovereigns. Values of the two classes can move in opposite directions at times of elevated stress.<\/p>\n

There can be other factors that raise yields\/depress values of corporates. In Europe, for example, stressed banks are focused on reducing the overall riskiness of their assets, so they become less ready to hold corporate bonds.<\/p>\n

Barclays Capital argues that yields on the strongest sovereign bonds are likely to remain extremely low for a very long time because of the serious shortage of \u201crisk-free\u201d assets relative to demand.<\/p>\n

The pool of high-quality bonds has contracted because so much of what used to be rated as safe is now regarded as high-risk \u2013 US mortgage agency debt, structured credit, sovereign bonds of the Club Med nations.<\/p>\n

Demand for the highest-quality stuff is strong, keeping down their interest rates, because:<\/p>\n