Friday, September 7, 2007

. Federal Reserve: "Factors Affecting Reserve Balances", September 5

- Fed's Treasuries holdings: $781.7bn (+$3.4bn)
- Other central banks' Treasuries holdings: $1,207.2bn (+$1.8bn) (*)
- Other central banks' agency securities: $773.0 (-$1.0bn) (*)
- Global Dollar Liquidity Measure: $2,761.9bn (+$4.2bn)

(*) Off-balance-sheet items

The first weekly Fed balance sheet for the month of september is out — and it contains mixed news at best. The good news is that, for the first time in two weeks, our Global Dollar Liquidity measure registers an increase (+4.2bn). The bad news concerns the annual rate of growth: it tumbled from 14.6% in August to just 13.4%, pushing my trusted long-term "model" for risky assets further into bearish territory. In a sense, the problem with the Global Dollar Liquidity is not unlike the situation faced by corporate earnings: tough —very tough— comparisons. In order for the rate of growth to continue above 10% in the months ahead, central banks will have to buy ... lots of securities!

Bearish thoughts, however, need to be kept in check by the wisdom of the Market Price Approach (*). The dollar is weak, commodity prices are strong, the Treasury yield curve is steepening: none of this heralds a significant dollar liquidity contraction. Are foreign central banks simply beefing up their SWFs? Is global liquidity assuming a different shape? Questions, questions.

(*) Manuel Johnson & Robert Keleher. Monetary Policy: A Market Price Approach (Westport, Connecticut: Quorum Books, 1996).

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