Wednesday, August 15, 2007

ENTER THE NARROWING TRADE DEFICIT (LONG-TERM BULLISH SIGNAL UNDER THREAT?)
[Latest Global Dollar Liquidity Measure: +14.9% annual growth rate; latest Endogenous Liquidity Index: -29.6%]

What a shame! Liquidity-wise, we are witnessing the most exciting times ever, and yet the Global Liquidity Blog is almost silent! I'll do my best to post more frequently over the coming weeks, if only to review some of the excellent material published in newspapers and blogs. Today, I wanted to briefly discuss the U.S. June trade data and its implications in terms of global liquidity conditions. (See, as always, the detailed analysis by Brad Setser). Arguably, the trade deficit has been one of the key drivers of funding liquidity.

As foreign CBs re-cycled part of their surplus into the U.S. credit markets, interest rates were kept (artificially?) low for ... years! In that respect, the evidence from the last weekly Fed balance sheet is not very encouraging: our Global Dollar Liquidity measure fell by $9.8bn and the annual rate of growth declined sharply to 14.9%. Is our measure already responding to what seems to be a narrowing trade gap?

Long-term bullish signal under threat
One of my most trusted, long-term indicators for risky assets is the simplest thing you can imagine: it just adds the rate of growth of the Global Dollar Liquidity measure to the rate of growth of the inverse of the Moody's Baa spread. In other words, it combines funding and market liquidity. Only rarely does it signal changes. The last bullish signal was flashed in January 2003, with the S&P500 at 855.7. As things stand now, it would seem that we are pretty close to the end of the bull cycle. A sharp fall in funding liquidity (3% or more), a further rise in the Moody's Baa spread (to 200 bps or more) —or a combination of both— would do the job.

1 comment:

Ames Tiedeman said...

The U.S. Trade Deficit is a huge problem. We will either end up being owned by foreigners or we will simply fade away. Both prospects are quite un-
American. Some basic facts: The U.S. has not had a trade surplus with the world since 1974. We have not had a trade surplus with Japan since April of 1976. We stopped having trade surpluses with Eurpoe in 1983. Fifteen years ago we did not have a trade deficit with China. Now we have a 250 Billion a year deficit with the People's Republic. A nation that does not make anything is a worthless nation. Worse, the longer we go without making the needed investments in our manufacturing infrastructure, the more knowledge we lose. We will either forget how to manufacture or we will simply not be good at it. Our creative energy fades away if we do not use it. Also, it is innate to want to make things. Kids play in sand boxes, youg men build tree forts. This is human nature. All of this is being taken away from the American people by idiots in Washington who do not know how to make trade deals. I may write a book on this topic.