Bridgewater Update June 6th

Bridgewater

June 6th:

* US is currently in a deleveraging process (reducing debt-to-income ratios) so expansion has relied on government sources of support and less on private sources.

* Growth has slowed significantly in the last month; household demand growth has been weakening since January, production growth has begun to slow, and Friday's jobs report confirmed that employment growth is now slowing as well.

* Further stimulation may be required to encourage growth in household spending.

* Friday's Employment Report:

o Payrolls rose only 54K in May, compared to 200k+ of the last few months

o Private sector only added 80K jobs vs. 213K in April

o State/Local Government, Manufacturing, Retail, and Leisure/Hospitality sectors lost jobs in May

o Unemployment rate rose to 9.1%

* Small Business key indicators, jobs openings and hiring plans that predict the unemployment rate both fell prior to recent slowdown.

* Employment growth has slowed to less than working age population growth and likely is no longer strong enough to push unemployment lower.

* Labor market data is looking much like last summer; prior to QE2 and fiscal easing that was implemented in order to increase spending and employment growth.

* Both manufacturing and non-manufacturing have slowed significantly.

* International reports lead to the same conclusion: growth is cooling.

June 7th:

* European Banking Authority (EBA) will postpone bank stress tests because of concerns about the accuracy of the data and the fact that there is no clear provision in place for handling the estimated large losses that would be exposed.

* Even in a benign scenario, Greece will run out of its original bailout package in early 2012.

* Greek default is a concern because the EU doesn't have the institutions to handle such an event; there is no European FDIC, no Treasury, no other mechanism for recapitalizing insolvent banks in an insolvent country and no political consensus on the proper way to ultimately deal with default.

* If one of the peripheral countries (Greece, Ireland or Portugal) defaults, the odds would favor contagion to Spain which would be a game changer for Europe.

o Spain has 1.5x the liabilities of the peripheral countries combined (€5.647 trillion)

o Spain's liabilities are more heavily weighted to the private sector

o Losses in the event of Spanish default would be massive

 €700+ billion for an orderly restructuring (back stopped by EU/IMF)

 €950+ billion for a disorderly restructuring (no access to fresh capital and distressed liquidations)

* The recent slowdown in growth and downward adjustment in growth expectations are the main drivers of the recent decline in bond yields.

* Real yields and inflation expectations have been declining since February

* Inflation expectations have turned lower as economic prospects as well as commodity prices have turned lower.

June 8th (Didn't receive Bridgewater)

* Ginnie