We should have stuck to our guns that interest rate would not rise until later in the year. The weakness of the recovery and the inability of profits to follow revenues are now being broadly recognised by the stock markets. The Fed dare not raise rates, lest they kill the modest growth there is. Europe and the UK seem unlikely to hike rates before the US does, although Australia, fairly booming away on the periphery, has had to. The massive increase in borrowing of the US Government to finance its deficit budgeting (T-Bond issuance $ 292 billion in 2001 rising to $ 424 in 2002) should normally put upward pressure on rates. However, the excessive liquidity in the economy, and growing disillusion with the risk/return mix on stocks, corporate bonds and emerging market sovereign bonds, make it perfectly credible that the Treasury will place its bonds easily. Old arguments about the Government competing with the private sector for investment dollars carry little weight when industry has all the funds it needs but little to invest in profitably (because of spare capacity and foreign competition). The high unemployment figures in the USA are bound to have a negative impact on consumer spending. We remain in awe of the US authorities' ability to maintain consumer confidence despite low industrial expenditure. We wonder whether they believe their own propaganda. As our little joke last week about issuance of the "Ostrich" coin implied, we see a strong case of at least self-denial.

All is not black, however. Recognition of the problems of the imbalances of the US economy, heralded not only by a weakening of the dollar but also by the softening of the absurd O'Neill doctrine that an overvalued dollar helps the US economy, is the first step on a long journey to correction and then to sustainable expansion.

We also see the first sign of springtime in Euroland. It cannot have escaped the most luddite politicians of the left that the turnaround of the UK economy, and its relative resistance to the current downturn, is a result of a potent mixture of personal incentive, curbed union power and moderate tax rates. Of course, there are severe shortcomings in public transport and the National Health, and it is important to find the balance between taxation and public services. However, it is the general "market" approach that is at stake. Euro zone countries are moving to the market, but with France and Germany the most recalcitrant. The forthcoming elections in both countries are of vital importance. If these two move from centre-left to centre-right, we would dare to dream of an economy that worked as one and realised the full potential of a common currency.

But our musings above have long-term implications. Right now, investors have to cope with disappointing stock markets, low yields in government bonds, nasty surprises in corporate bonds and overvalued sovereigns throughout the emerging markets. There is almost nowhere to go except long-term, quality government bonds and cash. Thus our "bar-bell" recommendation of the last two weeks remains for portfolios both in dollars and euros. A trend is emerging amongst our clients of putting more of their cash to work in bonds in euros at 10 years or even more.

In the context of whether euro zone countries are reforming, there is a fascinating story unravelling in Italy. Paolo Fresco, full of enthusiasm as a disciple of ex-GE boss Jack Welch and wanting to apply "Value-Based Management" to Fiat, reminds us of the old saying, "Don't talk to me about draining the swamp when I'm up to my a--- in alligators!" The wrong remedy for the company, the country and the time. Fiat Auto is not saveable. Giovanni Agnelli denies that Fiat Auto will ever be sold, but the put option to GM will surely be exercised in a year or two. In addition, it is emerging that Fiat, too, has huge "off-balance sheet" debt. The on-balance sheet debt is heading for junk status. Plus there is a great mystery: how could GM let itself be lumbered with having to buy a dog when the dog decides to sell itself? The broader issue for Italian politics is recognition that the country's industrial policy has been flawed for decades. Protectionism against Japanese cars and subsidies to Fiat have only delayed the day of reckoning.

2002 will be remembered as the year the pigeons came home to roost: US imbalances, excessive European taxation and ineffective industrial policies, under-funded pension schemes almost everywhere (partial exceptions: CH, GB and NL), refusal to reform in Japan, misplaced hopes that new technology would change the rules of economics, overvalued stock prices, audit reports far removed from "true and fair", analysts who recommend shares for all the wrong reasons, UK public services tarnishing otherwise good economic results - the list is endless, but we make our point.

Hunker down, protect your capital, no longer seek exceptional gains, be content to have modest positive returns. Boring, is it not? But an investment policy based on these principles matches our times while waiting for those French and German elections and for America to buy back its Ostrich coin (we do not expect Japan to do so!).

Recommended average maturity for bonds in each currency
Bar-bell in dollars and euros, lengthen in Swiss Francs, but no change yet in Sterling.

Despite the EURO staging a very nice comeback and nearly testing a high of 0.9200, we would be very specific about this rally and call it USD weakness and not at all EUR strength (e.g. consider EURO/CHF). Yesterday the FOMC opted for no change in monetary policy saying that they intend to remain on hold for the foreseeable future and postpone any future hikes. They remain optimistic about productivity, but point out that demand needs to pick up to ensure a sustained recovery. Economic data continue to be mixed and the sentiment towards the dollar remains negative. Europe has its own problems with IG Metall workers on strike and threatening to enlarge their action the Berlin region. Portugal is trying to calm down the EU and promising to bring its finances back to order by 2004. We see a consolidation period first before further EUR strength might be on the cards.

EUR/USD: Our first target of 0.9130 has been reached and even overshot. Next targets are 0.9250 and 0.9340. A short term correction is likely first, with a clear break of 0.9100 looking for 0.9050, 0.8990 and 0.8930.

USD/CHF: Even with the SNB cutting rates for the second time, specifically to weaken the currency, the CHF powered ahead and nearly reached our final target in this move of 1.5800. Here as well, a short-term correction is to be looked for first, and a clear break of 1.6000 might target 1.6150 followed by 1.6330. Any direct move below 1.5750 opens the way for at least 1.5650.

USD/JPY: Consolidation is underway in a broad 126.50 to 130.00 range. We remain convinced that we shall see further JPY weakness over time as intervention threats below 126.00 are put into effect.

EUR/JPY: Same comment: the major support zone remains around 114.50/80 and is holding for the time being. The upside is capped by 116.50, 117.20 and 117.80. Any sustained break of 114.50 would see this cross immediately down to 113.00.

USD/CAD: We expect some consolidation in a 1.5550 to 1.5780 range. We might reconsider re-establishing a short USD/CAD position in the high 1.57s.

AUD/USD: Same comment: the Aussie has continued to move gradually higher but has met tough resistance at 0.5450. Major support is now at 0.5330. Consolidation is expected in a 0.5350 to 0.5450 range.

GBP/CHF: Sterling continues to be under pressure and 2.3850 is now providing very strong resistance. Downside targets are 2.3250, 2.3160 and 2.3000. Consolidation may be expected here also.