Tuesday, April 24, 2007


- A sharp fall in our "Endogenous Liquidity Index". Our preliminary ELI fell 2,1% yesterday on the heels of the VIX (which surged 8%). CDS and high yield bond spreads also pulled the index lower, while the "carry trade" factor was unchanged (no news on policy rates). Only the Goldman Sachs share price —trading at a new all-time high— provided some support.

- Jim Griffin: Liquidity conditions "lush". ING's Jim Griffin quotes Kenneth Heebner, the "highly regarded manager of the CGM Realty Fund", who told Bloomberg that U.S. home prices will fall “at least 20%” this year. Says Griffin: "In liquidity conditions this lush, with six handle conventional mortgage rates, it is difficult for me to imagine such a calamity".

- Glenn Reynolds: Beware of "a turn in the global liquidity tide". Glenn Reynolds, the head of CreditSights, tells the Financial Times that "none of the major developed economies is immune to a turn in the global liquidity tide". For example, much of Germany's export growth "has been driven by the boom in China and elsewhere in the global economy, which itself has been due in large part to generous global liquidity conditions. The lagged impact of monetary tightening by the world’s major central banks is already beginning to hurt the US housing market, but in time it will also have a general dampening effect on Germany’s major export markets". Clearly, Mr. Reynolds thinks that G7 central banks are the key drivers of global liquidity growth.

- Brad Setser & Reserve growth. Brad Setser worries about the stunning growth of central bank reserves in 2007, which he deems unsustainable. This is something that liquidity bulls have to keep in mind. I used to worry myself whenever the rate of growth of Treasury and agency securities held at the New York Fed by foreign central banks would surpass 20%. (It is now at 18.9%). Nothing serious happened, however, between October 2003 and January 2005, when we reached ... 34%! Thus, I worry less now — but I'll definitely keep an eye on Mr. Setser's blog.

- Steen Jakobsen's blog: don't miss it. Steen Jakobsen, executive director at Saxo Bank, discusses trading ideas in his blog. In a post published this morning, he takes a look at falling real estate prices in Spain and warns readers: "... at extremes EVERYTHING is correlated". A very useful blog indeed!

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