Friday, August 31, 2007

. Federal Reserve: "Factors Affecting Reserve Balances", August 29

- Fed's Treasuries holdings: $778.3bn (-$2.6bn)
- Other central banks' Treasuries holdings: $1,205.4bn (-$13.5bn) (*)
- Other central banks' agency securities: $774.0 (+$6.4bn) (*)
- Mackinlay's Global Dollar Liquidity Measure: $2,757.7bn (-$9.6bn)

(*) Off-balance-sheet items

Is the boom in funding liquidity over? The August numbers certainly suggest so. August 2007 is by far the worst month on record in terms of our Global Dollar Liquidity measure (-$35.5bn). But wait a minute. Year-on-year comparisons are still strong: the 14.6% rate of growth is still indicative of a healthy, if not spectacular, rate of world economic growth. So what is going on? It is difficult to avoid the obvious conclusion: the global flight to quality is forcing central banks to sell a portion of their custody holdings at the New York Fed. There seems to be a worldwide mini-banking crisis going on, with talk that Barclays borrowed heavily at the Bank of England discount window, ongoing rumors about the health of the German banking system, and the less unexpected noise about Russian, Kazahk, and South American banks.

If credit spreads do not register a dramatic improvement today, my long-term model for risky assets (which combines changes in the Global Dollar Liquidity measure and in Moody's Baa spreads) will likely turn bearish ... Time to say goodbye to Macro Man's expected W-shaped recovery? (for which I voted, by the way)? Time to sell rallies?


Macro Man said...

Somewhat ironic that you are on the verge of turning bearish as markets are in the proces of seeing wonderful news in eveything....

Agustin said...

Maybe credit spreads will improve dramatically today! On the other hand, if they do not improve --AND funding liquidity continues to deteriorate-- I think the market will run into trouble.

Anonymous said...

The question is whether this liquidity indicator is a lagging or preceeding indicator.

Ie are the changes you observed the wash-out of the last couple of weeks, or to they foresee a tightening of risk credit to come.

The equity markets could not care less this week, they seem to have decided that even if something bad happens to the banks, someone will bail them out.