Tuesday, May 22, 2007


[Latest Global Dollar Liquidity Measure: +13.84% annual growth rate; latest Endogenous Liquidity Index: +11.25%]

Am I a perma (liquidity) bull? Judging from a number of recent e-mails, this must be the impression readers get from the Global Liquidity Blog. My answer, however, is always the same: I'm just trying to measure the beast. When I say that the current liquidity boom is unprecedented, it's for a reason. Previously, our Global Liquidity Measure had never grown north of 10% for fully 54 months in a row. VoilĂ . I hope this settles the issue. (I'll be glad to report about the next liquidity downturn as soon as it materializes).

Meanwhile, there are some very respectable growling credit- and liquidity bears out there:

- John Plender & the next 'savage downturn'. The Financial Times economist doesn't buy the argument that "structured products uniformly enhance market efficiency". Instead, he warns, "collapsing standards will now stretch out the credit cycle while ensuring the delayed downturn will be more savage when the defaults finally happen". Ironically enough, the "mispricing of credit" is driven by the illiquidity of CDOs and CLOs, which limits the scope for marking to market.

- Steve Previes & the 'global liquidity bubble'. The Jefferies International strategist told CNBC Europe that markets face a "global liquidity bubble", with key central banks pouring too much money into financial markets. "There's a situation of excessive liquidity, with too much money chasing too few deals".

- Gillian Tett & the 'bubble-like conditions in the credit markets'. Over an expensive lunch with a "senior banker", the Financial Times' capital markets worries about extraordinary "bubble-like conditions in the credit markets". Tett does not sound very convincing when she mentions the pattern of the business cycle: even the very cautious Bank of England's Financial Stability report all but concedes that the nature of the business cycle has been permanently altered. The real problem is whether institutions are becoming "more cavalier about lending risk", as Tett puts it. As Machiavelli said, "Perché un uomo che sia consueto a procedere in uno modo, non si muta mai". Human nature does not change ...

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