LIQUIDITY ANALYSIS. "BIG LIQUIDITY" V. "SMALL LIQUIDITY"
. CNBC

Squawk Box just aired an interview with Jack Ablin, chief investment officer at Harris Private Bank. Ablin mentioned two kinds of liquidity: "big liquidity" and "small liquidity". The former refers to investment flows from the global economy, driven by external deficits and by demographics. The latter refers to more microeconomic issues, specific to individual markets. According to Ablin, "big liquidity" trumps "small liquidity" ― risky assets will continue to benefit from huge waves of investment flows.

To my mind, the real issue is: what determines the shape of the yield curve? If "big liquidity" is the key element, then the credit markets are simply responding to an increase in the supply of loanable resources ― a healthy development. On the other hand, if long-term rates reflect a sharp fall in demand for credit, then a 5.25% bank rate will cause a lot of pain. Watch credit spreads and ... the monetary base.