Monday, September 24, 2007

[Latest Global Dollar Liquidity Measure: +13.4% annual growth rate; latest Endogenous Liquidity Index: -18.0%]

The "Credit Wildfire" hypothesis; long liquidity cycles; improved Endogenous Liquidity Index. [More updates expected ...]

[1] The Credit Wildfire hypothesis. Jack Malvey, global fixed income strategist at Lehman Brothers, has written an important piece on the credit crisis. The current episode, according to Malvey, is "far from the greatest credit contraction of all time". In fact, he calls it a mere 'Credit Wildfire', a garden variety crisis with three important features: (i) it does not last long (three months on average); (ii) it ends with decisive action from central banks; (iii) it signals the "mature phase of business cycles". Fascinating stuff: read it all.

[2] Michael Pettis on globalization cycles & liquidity. Guest-blogging at Brad Setser's blog, Michael Pettis, professor of Finance at Peking University's Guanghua School of Management, writes about long-term liquidity cycles: " ... globalization cycles are driven largely by new developments or structural changes in the financial system that cause a significant increase in global liquidity and a concomitant increase in risk appetite ... These liquidity cycles were never smooth sailing but were often interrupted by sometimes shockingly severe crises ... Some well-known examples might be the Overend Gurney Crisis in 1866, the Panic of 1907, or the 1976 Peso Crisis and, I am willing to bet, the sub-prime mortgage crisis of 2007". According to Pettis, the current long cycle will end when the U.S. current account finally adjusts.

[3] Improving Endogenous Liquidity Index. Courtesy of Bernanke & Co., our Endogenous Liquidity Index has just registered its sharpest weekly gain since inception: +14.4%! All components went up: CDS and cash bond spreads, volatility readings, measures of financial innovation. The Index trades at at two-month high.

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