Wednesday, September 26, 2007

[Latest Global Dollar Liquidity Measure: +13.4% annual growth rate; latest Endogenous Liquidity Index: -17.7%]

PIMCO & the Bretton Woods II system; a contrarian view on the dollar; reflation vs. inflation; a look at our Endogenous Liquidity Index.

[1] PIMCO against the Bretton Woods II system. PIMCO Bonds's "Renegade Economics: The Bretton Woods II Fiction", by Chris P. Dialynas and Marshall Auerback, is a truly amazing piece of economic reasoning. Yes, we all know that the system has many drawbacks, that it fosters speculation, that is stimulates the carry trade, etc, etc. However, I can't help but remaining a bit suspicious whenever a bond firm calls for "Japan-style zero interest rate policy [ZIRP] for the U.S. in combination with strategic and iterative fiscal tightening".

[2] A contrarian view on the dollar. Saxo Bank's Steen Jakobsen contends that "US fixed income is extremely cheap in currency adjusted basis" and that "EURUSD was .8600 in 2000... now 1.4200 ??? I remember distinctly how NO ONE wanted EURO then, this is the same US moment".

[3] Morgan Stanley's Richard Berner: more Fed easing ahead. Berner notes that while financial conditions have eased somewhat, money markets are not free from stress: "Between July 2006 and June 2007, the spread between fed funds and three-month LIBOR averaged 11.3 bp; that spread peaked at 83 bp last week and is currently 45 bp. Moreover, spreads between the rates banks are charging their customers and LIBOR and between credit market rates and LIBOR are also wider than two months ago". On the inflation front, adds Berner, the theme is "reflation rather than inflation".

[4] Daily Endogenous Liquidity watch. Another quiet day in terms of our Endogenous Liquidity Index, which closed unchanged. The VIX and CDS spreads are playing cat and mouse, thereby offsetting each other. The index is now down 17.7% for the year (it reached an all-time low on August 18, at -35.1%).

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