Thursday, May 17, 2007

LIQUIDITY TALK. STEPHEN JEN'S BULLISH "PILLARS"
. Morgan Stanley Global Economic Forum

[Latest Global Dollar Liquidity Measure: +13.95% annual growth rate; latest Endogenous Liquidity Index: +9.35%]

Morgan Stanley's Stephen Jen discusses the current situation of "ample global liquidity", which he dubbs "Pillar 1" of the bullish case for risky assets:

Pillar 1. Ample global liquidity. This ‘real’ liquidity arises from a mismatch between world savings and investment rates. World capex has surprisingly been too low to absorb all available savings. Annually, there are some US$800 billion worth of ‘excess savings’ from oil exporters and Asian exporters to chase after assets.

Readers of this blog know that, every Friday morning, we publish our own version of this "Pillar"; we call it Global Dollar Liquidity Measure. Now, Jen's "Pillar 3" caught my attention, because although he does not include volatility measures in his definition of liquidity, they do feature prominently in our own Endogenous Liquidity Index:

Pillar 3. Global de-coupling and positive growth prospects. Global de-coupling has effectively reduced overall financial risk, relative to a world powered by a single growth engine. Whether the US is in a refreshing mid-cycle slowdown, or cycle-terminating event is critical. This question, I believe, is more complicated than deciding on the US housing market’s fate. I see the global economy as healthy, with 2007 as the fifth consecutive year with global growth above 4.0%. The first phase of the globalization growth process entails a massive increase in world useable labor force and I believe we are at the tail-end. The second phase should entail a sharp increase in capital expenditures, infrastructure and production capacity. The expansion of labor and of capital should enhance the global economy’s potential growth rate. Risky assets, theoretically, should be in a secular bull market. Apparent financial bubbles are actually well supported by solid global economic fundamentals. Inevitable ‘frictions’ from the globalization process will be just minor irritants. From this broader perspective, discussion on global de-coupling is unhelpful. The cyclical risks to the global economy are inflation, and the likelihood of the global economy driving the US housing market rather than the other way around.

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