Thursday, June 7, 2007

[Latest Global Dollar Liquidity Measure: +14.16% annual growth rate; latest Endogenous Liquidity Index: +8.6%]

I just came across this charming piece by the FT's Tony Jackson (I wish I could write with such wit). Mr. Jackson blasts the "it's different this time" crowd, whose members he duly labels IDTTs. According to Mr. Jackson, IDTTs are active in at least four fronts: corporate profits, global liquidity, commodity prices, and the UK housing market. The article provides an excellent opportunity to briefly assess some aspects of the current liquidity cycle.

When it comes to "Chinese savings, the yen carry trade, the surge in petrodollars and so on", Mr. Jackson tells readers that "most of those seem cyclical to me, or at least finite". Absolutely right! As a matter of fact, we are about to "celebrate" the tenth anniversary of the onset of the Asian currency crisis, when our Dollar Global Liquidity measure all but collapsed. In September 1998, at the end of the crisis, the stock of dollar-denominated bonds held by foreign central banks was declining by a staggering 12.6%!

In one respect, though, I have to disagree with Mr. Jackson when it comes to "Chinese savings". There is an element of IDTT in the current flow of global capital to the U.S.: the Dollar Global Liquidity measure is about to enter the 55th month in a row with a growth rate of 10% or more. This had never happened before. I wish I could say otherwise —I don't consider myself a member of the IDTT crowd— but that's what the numbers tell.

And then there's the issue of derivatives. Mr. Jackson takes a narrow one-to-one view. Yes, derivatives are a zero-sum game: you lose money/I make money. But consider the macro-economic impact of CDS. G7 central bankers, and even the IMF, agree on this point: credit risk is diversified as never before. Thanks at least in part to risk transfer markets, business cycles have become smoother. As the (very cautious) Bank of England recently put it, "less volatile collateral values promote steady credit, investment and growth rates". And this, ladies and gentlemen, is the very definition of ... liquidity!


Bitr said...

Hi Agustin, I would also (MacroMan asked about it earlier I believe) be quite interested in a chart version of your Liquidity measure. In particular would love to see it against some of the leading markets prices (say 10yr UST and SPX to start with) on both short (2-5yrs) and longer term (20-50yrs) time scales if possible at all. Thanks and cheers!

Agustin said...

bitr, the simple truth is I DON'T KNOW how to post Excel charts on the blog! Look at Figure 10, page 5 of the IMF document linked in this post: It's the IMF's liquidity measure. It's very similar to the one I use, except they take the US monetary base, whereas I take the stock of Treasuries held by the Fed. There are no big differences. Cheers.

Bitr said...

Appreciate your prompt and frank response, Agustin. I've seen the IMF chart but it didt satiate my appetite to be honest. Could you possibly email me the charts (copy and paste special as picture enhanced metafile or something like that into powerpoint slide) or even entire excel spreadsheet (if you dont worry about the copyrights that is) and i play around with it myself (and would email back results). Thanks and cheers.

Agustin said...

bitr. Let me think about it. Perhaps I could send you parts of my excel files.

Bitr said...

Oki doki Agustin. I assume you can see my gmail, if not pls let me know. Look fwd to your stuff. Cheers