Wednesday, October 31, 2007

[Latest Global Dollar Liquidity measure: +14.6% annual growth rate; latest Endogenous Liquidity Index: -20.2%]

Gold as a barometer of liquidity conditions; Governor Mishkin & the L-Word; Some common sense on the "Great Moderation".

[1] Bank Credit Analyst: gold as a barometer of liquidity conditions. "In our opinion, gold is an excellent barometer of liquidity conditions, and the latest move provides confirmation that the market is anticipating further reflation". So says Bank Credit Analyst, the outstanding Canadian consultant. I'm not fully convinced, though. [Bank Credit Analyst: "More Reflation On The Way?"].

[2] Frederic Mishkin & the L-Word. In his recent remarks on the role of the Federal Reserve bank as a liquidity provider, governor Mishkin mentions the L-word no less than ... 30 times! This is, hands down, the new world record. "Moral hazard could also arise when a central bank lends in response to liquidity problems, but I would argue that the risk of that happening might be lower than in the case of lending to troubled institutions. I have in mind situations in which markets become impaired for exogenous reasons. In those circumstances--when financial institutions that are otherwise perfectly solid are at risk of failure because market infrastructures are disrupted or, more generally, when financial instability originates outside the banking sector--an intervention by the Federal Reserve would certainly be beneficial, and the creation of perverse incentives would probably be limited". [Frederic S. Mishkin: "Financial Instability and the Federal Reserve as a Liquidity Provider", Federal Reserve Board].

[3] Great Moderation Watch: finally some common sense [Liquidity @ Financial Times]. William Gamble, president of Emerging Market Strategies, warns about emerging nations' "information deficit". While "excess liquidity" has allowed a "disassociation bewteen perceived and actual risk", the truth is that emerging countries lack "credit reporting, efficient courts, private banks or even free speech, in short accurate and timely information, has so far buried potential issues". Further, "the bankruptcy systems, the plumbing of economics, is either non existent or dysfunctional in all but the most developed economies. If things go south, which in time they always do, putting these economies back together will be a long and difficult process". [William Gamble: "Beware information deficit in emerging nations", Financial Times] [See also Mr. Gamble's blog].

Tuesday, October 30, 2007

[Latest Global Dollar Liquidity measure: +14.6% annual growth rate; latest Endogenous Liquidity Index: -19.0%]

Great Moderation Watch, again; liquidity @ Financial Times; bearish Bill Gross; Bill Luby and a new era for the VIX; the Financial Ninja & the mysterious spike in the Fed funds rate.

[1] Great Moderation Watch: the IMF. I don't know what to make of this, but the fact is, everybody is talking about the "Great Moderation" of the business cycle and related ideas ("great divergence", "global decoupling", etc). Readers of this blog will recall that, IMHO, the "Great Moderation" is a key component of market liquidity. In chapter 5 of the World Economic Outlook, IMF ecomomists ask themselves: 'What is Driving the Moderation of the Global Business Cycle?' They single out three key variables: (a) Institutional quality; (b) Macroeconomic policies; (c) Financial deepening. (They discard, rather surprisingly, the role played by inventory management techniques). They conclude with guarded optimism: "... the increased stability of economies and the associated increase in the durability of expansions largely reflect sources that are likely to prove persistent ... Overconfidence in the ability of the current policy framework to deliver stability indefinitely would certainly not be warranted. Although the business cycle has changed for the better, policymakers must remember that it has not disappeared". [IMF: "The Changing Dynamics of the Global Business Cycle", World Economic Outlook].

[2] Great Moderation Watch: Liquidity @ Financial Times. The FT's Andrew Wood interviews a number of economists about the "great divergence" and the associated issue of "global decoupling". According to Geoff Lewis at JF Asset Management in Hong Kong, "decoupling is a fact", and it is largely due to the 'domestic nature' of Asian economic growth. Mr. Lewis feels confident enough to shrugg off 'the view that any credit squeeze-induced slowdown in the US would affect Asia'. But decoupling has many doubters, as Andrew Wood points out. He cites Markus Rosgen (Citigroup) and Bryan Olson (Charles Schwab) as chief sceptics. Monetary and exchange rate policies are not decoupled, they argue. My own two cents: in the short term, decoupling is a fact, and it will help the "Great Moderation" cause. But I worry about ... the medium term. [Andrew Wood: "Why the talk about a great divergence could be premature", Financial Times].

[3] Great Moderation Watch: Morgan Stanley. Richard Berner analyzes inventory to sales ratios, both in nominal and real terms, and concludes that 'the downside risks from the inventory accelerator are limited'. Indeed, he adds, 'the offshoring of production has a silver lining: It shifts the inventory cycle to overseas locations and reduces the cyclicality of US output'. [Richard Berner: "Inventories: A Recession Trigger?", Morgan Stanley GEF]. Berner's collegue Stephen Jen reviews the definition of Sovereign Wealth Funds and argues that 'SWFs already played a meaningful role in September, facilitating the recovery in EM equities and equities in general. Having such a different ‘temperament’ from private funds, SWFs should reduce the risk of ‘herd behaviour’ ... Furthermore, market efficiency is a function of market liquidity. To the extent that SWFs improve market liquidity, particularly in a way that is not ‘herdish’ like other types of short-term capital flows, SWFs should be a positive factor for markets in general". In other words, SWFs are seen as a source of stability, and as such they contribute to market liquidity. [Stephen Jen: "The Definition of a Sovereign Wealth Fund", Morgan Stanley GEF].

[4] Bearish Bill Gross. The very bearish PIMCO manager sees more pain ahead — much more: "An increasingly recessionary looking U.S. economy will likely require 1% real short rates and 3½% Fed Funds in order to stabilize a potential growth contraction in lending not witnessed since the early 1970s or, to be honest, Roosevelt’s depressionary 1930s". [Bill Gross: "Shadow Dancing". PIMCO Bonds].

[5] Bill Luby & the VIX. Because the VIX plays a non-trivial role in my Endogenous Liquidity Index, I always pay attention to what Bill Luby has to say. Well, Bill is a cautious bull — on the VIX, that is (I guess I could call him an "endogenous liquidity bear"). According to Bill, a 15 VIX increasingly looks like a long-term bottom. [Bill Luby: "Volatility in a 130/30 Era", VIX and More].

[6] A mysterious spike in the Fed funds rate? Ben Bittrolff has detected an "ominous spike in the Fed Funds rate on 10/25/07 to 15%. The data is here". Any ideas? ["WTF Happened to the Fed Funds Rate?", The Financial Ninja].

[7] Bearish David Malpass. The Bear Stearns chief international economist, a keen watcher of liquidity trends, sounds very bearish. [HT: Rich Karlgaard & his excellent blog]. "We expect", writes Malpass, "a credit-driven economic slowdown beginning in the fourth quarter due to the August changes in credit markets. We think the U.S. slowdown and global credit market disruptions will pressure earnings, equity prices, commodities and foreign growth more than is reflected in the current consensus ... We expect inflation to be problematic in coming months as prices make up for dollar weakness. We think the Fed underestimates this linkage". [Rich Karlgaard: "Third Quarter Strength, Stagflation Ahead", Digital Rules].

Monday, October 29, 2007

. Federal Reserve: "Factors Affecting Reserve Balances", October 24

- Fed's Treasuries holdings: $780.6bn (-$3.1bn)
- Other central banks' Treasuries holdings: $1,234.1bn (+$3.9bn) (*)
- Other central banks' agency securities: $796.5 (+$8.5bn) (*)
- Global Dollar Liquidity Measure: $2,811.2bn (+$9.3bn)

(*) Off-balance-sheet items

[1] A wedding party in Tuscany: on Chianti wine & the euro. On Wednesday evening Claudia and I finally made it to the Tuscan village of Pietraviva, about 20 miles from Siena. Our friend's wedding party took place on Thursday near the village of Pogi, and by Saturday evening we were back in Amsterdam. Now, Bill Luby is the financial blogosphere's wine specialist. Although I know next to nothing on the subject, I will say this: the Dievole Novecento Riserva Chianti Classico 2001 was ... spectacular. The Dievole company, by the way, is a fine example of Italian entrepreneurs fighting the strong euro with their only remaining weapons: creativity, innovation, risk-taking.

[2] More on Chianti wine & the euro. By turning old and inefficient farms into lavish, lucrative wine-tasting facilities, these entrepreneurs are transforming the Tuscan landscape. Dumping the lira in favour of an international reserve currency was always going to be a risky venture: damaging bouts of exchange rate appreciation —like the one we are witnessing right now across the eurozone— would inevitably occur. The minute you cease to act as an exporting periphery, you have no choice but to turn yourself into a center of growth and innovation. One can only hope that many more Italian entrepreneurs will follow the example of Tuscan wine producers.

[3] Weekly Fed balance sheet watch. Another impressive performance, and a clear sign of resilience in the world economy. Our Global Dollar Liquidity measure registers a $9.3bn increase — taking it to a new all-time high of $2,811bn. This, in turn, translates into a 14.6% annual rate of growth. Note the striking absence of the Federal Reserve as a provider of domestic liquidity, which brings the growth rate of its stock of Treasuries (a proxy of the monetary base) to less than 3%. Will euro bulls take note?

[4] Great Moderation Watch: Jeff Immelt & global liquidity [Liquidity @ Financial Times]. "In the world as a whole", says Jeffrey Immelt, the head of General Electric, "there is still a lot of liquidity". Here, Mr. Immelt refers to global macroeconomic liquidity. But there's more on the subject of market liquidity. First, the GE capo mentions SWFs: "The impact of sovereign wealth funds is considerable". Second, and crucially important in terms of the Great Moderation thesis: "China and India will shield GE from US downturn ... If you consider the problems in the credit markets, they will not have an impact on the vast majority of GE's business. In other words, the overall effect on GE will be limited". Bingo! No wonder Peter Marsh concludes: "[Immelt's] comments will be welcomed by adherents of the theory of 'decoupling' ... in which growth in the world becomes the key component of economic expansion". [Peter Marsh: "China and India will shield GE from US downturn, says Immelt", Financial Times].

Wednesday, October 24, 2007


Tuesday, October 23, 2007

[Latest Global Dollar Liquidity measure: +14.4% annual growth rate; latest Endogenous Liquidity Index: -21.7%]

Great Moderation Watch; LiquidityHub goes live; liquidity @ Financial Times; Bear Stearns & Citic deal.

[1] Great Moderation Watch: Saas, anyone? In his remarkable speech on "Liquidity, liquidity, liquidity", Bank of Canada Deputy Governor David Longworth singled out "better inventory management" as one of the causes of the "Great Moderation" of the business cycle — a crucial component of market liquidity. The way I see it, the key indicator to gauge the impact of inventory management is the inventory-to-sales ratio. Is there room for even more improvement? From what I read, the answer is inequivocally: "Yes". Thanks to Software as a Service, otherwise known as SaaS, small- and medium-sized businesses will soon have the opportunity to manage their inventories with the help of efficiently-priced software. [Phil Wainewright: "Ketera tames the supply chain’s long tail", ZDNet].

[2] Great Moderation Watch: surging Bric IPOs [Liquidity @ Financial Times]. According to an Ernst & Young report on IPOs, "Seven out of the top 10 IPOs in the third quarter were from emerging markets. The Asia-Pacific - led by China and Hong Kong - had the lion's share in terms of both the number of IPOs completed and the total capital raised. The record numbers of IPOs in the emerging markets show that it is these countries that are driving global economic growth". Even Argentina, with its rather hostile financial climate, has managed to produce a $532 m IPO. [Joanna Chung: "Record level of 'Bric' economy IPOs offsets fall", Financial Times]. See also Morgan Stanley's Stephen Jen's comment on the economic impact of Sovereign Wealth Funds: "SWFs help shift the balance of power in favour of the ‘periphery’ and against the ‘core’ economies in the world".

[3] LiquidityHub goes live! (Liquidity @ Financial Times). LiquidityHub, the bank-sponsored trading platform designed to facilitate access to interest rate swaps and US Treasuries went live yesterday with euro interest-rate swaps. "The battle for trading liquidity has seen the formation of numerous dark liquidity pools that allow transactions to take place on private inter-bank or intra-bank platforms, in competition with exchanges and other traditional marketplaces ... LiquidityHub's launch will help to facilitate deeper pools of liquidity in the market while leveraging the latest capabilities in electronic trading of fixed income products". [Paul J. Davies: "LiquidityHub launches swaps product", Financial Times].

[4] Flows & stocks in reserve analysis [Liquidity @ Financial Times]. Win Thin, currency strategist at Brown Brothers Harriman & Co., aruges that China is not dumping US assets: "... diversification does not automatically mean outright dollar sales, which is supported by the ongoing purchases of dollar assets by China. China may be diversifying its new inflows, but it is still a net buyer of dollars and dollar paper. Our understanding is that most reserve managers are diversifying their new flows, not their existing stocks of dollar holdings". Good point. Many analysts tend to confuse flows and stocks: more on that soon. [Win Thin: "Claims that China is dumping US assets are spurious", Financial Times].

[5] The Bear Stearns-Citic deal. "The key thing is keeping the money on the table", says Thomas Barnett, the author of the Pentagon's New Map. War and Peace in the XXI century (Putnam, 2003) (blog). Barnett is, IMHO, the world's top globalization expert. "To keep the money on the table": that's what the Bear Stearns-Citic deal is all about. [Sundeep Tucker: "Bear Stearns unveils Citic deal", Financial Times].

Friday, October 19, 2007

. Federal Reserve: "Factors Affecting Reserve Balances", October 17

- Fed's Treasuries holdings: $783.7bn (+$0.4bn)
- Other central banks' Treasuries holdings: $1,230.2bn (+$8.4bn) (*)
- Other central banks' agency securities: $788.0 (+$6.0bn) (*)
- Global Dollar Liquidity Measure: $2,801.9bn (+$14.7bn)

(*) Off-balance-sheet items

Amid all the gloom and doom surrounding the dollar and the earnings outlook in the banking sector, the weekly Fed balance sheet manages to produce an unmistakable sign of resilience. In all likelihood, October will end as the 59th month in a row with our Global Dollar Liquidity measure rising at more than 10% annually. This is, of course, unprecedented — and I take it as a vote of confidence in the strength of the global economy.

Until proven wrong on that score, I will stick to the following key insights when interpreting the data: [1] The custody numbers, while woefully incomplete, are delivered in almost real-time, and are as such much more valuable than their TIC cousins; [2] To the extent that BRICs entrepreneurs are willing to take on more risks in their own currencies, their actions will naturally be reflected in official CB intervention in the U.S. bond market. (In other words, is official intervention such a bad thing?)

Thursday, October 18, 2007

. David Longworth: "Liquidity, liquidity, liquidity", Bank of Canada

Memo to liquidity watchers worldwide: do not miss this speech by David Longworth, Deputy Governor of the Bank of Canada. "Liquidity", says Mr. Longworth, "is one of those words that are used to mean slightly different things in different contexts". There are three concepts of liquidity that are relevant to the world of finance: [1] macroeconomic liquidity; [2] market liquidity; [3] balance-sheet liquidity. Macroeconomic liquidity has to do with "overall monetary conditions", including interest rates, credit conditions, and the growth of monetary and credit aggregates.

This concept, in turn, can be seen from a domestic and from a global perspective. From the domestic point of view, Mr. Longworth singles out the monetary base as the key central bank tool to influence short-term interest rates. He says little about global macroeconomic liquidity, although he remarks that "one can aggregate macroeconomic liquidity across countries to obtain average world real interest rates and the average growth of monetary and credit aggregates". From the perspective of the Global Liquidity Blog, the truly interesting part of the speech starts with the definition of market liquidity.

Market liquidity & the "Great Moderation"
"Liquidity", says the Deputy Governor, "is the lifeblood of markets ... [It] is essential to the well-functioning of both the real economy and financial markets". The more liquid the market, the better — with an important caveat: complacent investors may be tempted to take on too much risk. Mr. Longworth then proceeds to define market liquidity:

Market liquidity refers to the extent to which one is able to quickly and easily buy and sell financial assets in the market, without moving the price. Market liquidity captures the aspects of immediacy, breadth, depth, and resiliency in markets. Immediacy refers to the speed with which a trade of a given size and cost can be completed. Breadth, often measured by the bid/ask spread, refers to the costs of providing liquidity. Depth refers to the maximum size of a trade for any given bid/ask spread. Resiliency refers to how quickly prices revert to fundamental values after a large transaction.

Several factors help to explain the tremendous growth in market liquidity over the past 15 years: the appearance of new players such as hedge funds, financial innovation (derivatives, CDOs), the growth of electronic trading, back-office innovations. But here's —at least from my perspective— the key statement of the speech:

... efficiency gains in the financial sector, better inventory management, and better macro policy – including monetary policy – resulted in what has come to be called the "Great Moderation," which was a significant reduction in the variability of output, inflation, and long-term interest rates across most G-7 countries, starting in the mid-1980s. And this moderation has, in turn, contributed to the liquidity of financial markets by reducing some of the fundamental sources of financial volatility and risk.

Bingo! This is the very raison d'être of our own Endogenous Liquidity Index! The rest of the speech is devoted to "recent events around the world". Note the connection between market and macroeconomic liquidity: as credit markets froze in the second week of August, "the rate on overnight collateralized transactions moved above the target overnight rate". This forced the central bank to inject macroeconomic liquidity in order to avoid sharp discrepancies between the target rate and money market rates.

Wednesday, October 17, 2007

[Latest Global Dollar Liquidity measure: +14.2% annual growth rate; latest Endogenous Liquidity Index: -15.7%]

The "conundrum" deconstructed; Intel results & endogenous liquidity; central banks & credit creation; liquidity @ Financial Times.

[1] The deconstruction of the conundrum. Morgan Stanley's Joachim Fels and Manoj Pradhan note the renewed steepness of the U.S. Treasury yield curve and proceed to deconstruct Greenspan's conundrum, as defined by the former chairman himself: "I was perturbed because we had increased the federal funds rate, and not only had yields on ten-year treasury notes failed to rise, they'd actually declined. (…) Seeing yields decline at the beginning of a tightening cycle was extremely unusual". (The Age of Turbulence, New York 2007, p.377). The key to the deconstruction is the convergence between an easier Fed monetary policy and a more agressive, risk-oriented investment policy by Sovereign Wealth Funds. [Joachim Fels & Manoj Pradhan: "The Bond Un-Conundrum", Morgan Stanley GEF].

[2] Intel results. Intel shorts get squeezed as the company announces stellar results and raises guidance (release). I was struck by the distribution of "geographical revenue": +52% in Asia Pacific, +20% in the Americas, +18% in Europe. While demand naturally slows in G7 countries, the Asian economic boom is intact. Anecdotical evidence from Infineon and ASML points in the same direction. While Ifineon products are eagerly snapped up by Shanghai's DareGlobal Technologies, ASML boasts about the productivity enhancements achieved by Taiwanese clients. My point, ladies and gentlemen, is simple: the "Great Moderation" of the business cycle is alive and well. G7 weakness, if it does indeed materialize, can be offset —at least in the short term— by BRIC strength. Endogenous liquidity conditions should improve. [See also Dan Harris: "China's Little Dirty Secret", China Law Blog].

[3] Liquidity @ Financial Times: on central banks & credit creation. Claire Jones, editor of Central Bank News, argues that central banks kept interest rates deliberately low "because they wanted to encourage borrowing in order to maintain growth following the bursting of the dotcom bubble. It was the response of the banking industry to this policy, not central bankers being 'still in denial' over the relationship between credit and interest rates, that is ultimately to blame for today's mess". As John Adams would say, "human nature will never change". [Claire Jones: "Don't pillory the central bankers", Financial Times].

[4] Liquidity @ Financial Times: credit markets recovery. Three FT stories seem to point in the same direction: credit markets are recovering. "Banks led by Citigroup yesterday sold $2.2bn in junk bonds to fund KKR's leveraged buy-out of First Data, completed in September, amid resurgent demand for risky, high-yield debt", writes Stacy-Marie Ishmael. David Oakley, in turn, sees signs that the sterling corporate bond market has reopened: "In the first corporate issue since June, Veolia Environnement, the French utility, raised £500m in a highly popular deal". Finally, Paul J. Davies analyzes the short-covering rally in the LevX senior index.

Tuesday, October 16, 2007

[Latest Global Dollar Liquidity measure: +14.2% annual growth rate; latest Endogenous Liquidity Index: -14.1%]

Liquidity is a public good; PIMCO strategy; Bank Credit Analyst on the Fed.

[1] Liquidity @ Financial Times: liquidity is a public good. The debate about liquidity risk goes on. Jonathan Ward presents the case against over-regulation: "Liquidity is a public good, which banks are partly responsible for providing. For a bank to insure itself against the very worst liquidity crises on the assumption that there is no central bank would not be rational. Liquidity risk arises from different sources and is managed in different ways. It depends on the unpredictable collective behaviour of counterparties and depositors. It is not easily susceptible to quantification: most of the time liquidity costs are predictable and small; occasionally, liquidity collapses. Rigid 'one size fits all' rules are not appropriate here". [Jonathan Ward: "An international liquidity accord is no solution", Financial Times].

[2] PIMCO's Powers on investment strategy. (a) Liquidity & spreads: "At recent forums, we have noted that credit was trading at abnormally tight spreads because of a global glut of liquidity and bids from structured products for corporate exposure"; (b) Bullish on BRIC currencies: "We favor the Brazilian real, the Mexican peso and the Russian ruble"; (c) Steepening trades: "A review of prior Fed easing cycles shows that a curve steepening of two-year notes versus 10-year notes contributes more powerfully than a bet on rates"; (d) Cautiously bearish on volatility: "Our secular view is that the developing world will continue to grow at 8%-11% despite much slower growth in the developed world in the area of 2%, allowing the global economy to continue growing at 4%-5% ... As volatility has crept back into the market, prospects for volatility sales look more interesting going forward". [PIMCO: "William C. Powers Discusses PIMCO’s Cyclical Outlook and Global Strategy"].

[3] Bank Credit Analyst on the Fed. More easing ahead, but its timing remains elusive, says the Canadian global markets consultant: "The economy is soggy, not collapsing, giving the Fed time to assess how the outlook is shifting. Policy is still too tight relative to underlying economic trends, and we expect more easing in the coming year, taking the funds rate to 4% or below. But the timing will be less predictable than when the Fed was raising rates". [BCA Research: "What Next for Fed Policy?"].

Monday, October 15, 2007

[Latest Global Dollar Liquidity measure: +14.2% annual growth rate; latest Endogenous Liquidity Index: -11.9%]

Risk management & the Great Moderation; liquidity @ Financial Times; Brad Setser on missing Chinese reserves.

[1] Liquidity @ Financial Times: Risk management & the Great Moderation. In early 2006, the Chicago Mercantile Exchange launched Snowfall Futures and Options contracts. The exchange also offers the Hurricane Event futures and options and its sister contracts: the Hurricane Seasonal futures and options and the Hurricane Seasonal Maximum futures and options [CME]. In early June, just as our Endogenous Liquidity Index was reaching new highs, Goldman Sachs even launched a CDO based on CAT bonds! Today's FT carries a front page-story on freight derivatives, which is on course to become a ... $150bn market! Ladies & gentlemen, my point is that the growing panoply of financial instruments created to price and trade risk is itself a key element of the "Great Moderation" of the business cycle — which bodes well for liquidity conditions. Sell volatility on rallies! [Jennifer Hughes: "Weather derivatives: Bonds help cushion a catastrophe", Financial Times; David Oakley: "China factor helps drive freight derivatives", Financial Times].

[2] Liquidity @ Financial Times: liquidity regulation. Karel Lannoo, CEO of the Centre for European Policy Studies (CEPS), argues against "another EU directive to regulate bank liquidity". According to Mr. Lannoo, "Liquidity is very much a relative concept, which lends itself to standards, not to tight rules. It is a function of the risk profile of a bank, which will be difficult to put down in a directive, unless it becomes an unworkable piece of regulation". [Karel Lannoo: "Tight rules not suited to liquidity", Financial Times].

[3] Liquidity @ Financial Times: a $75bn super-fund? The Master Liquidity Enhancement Conduit (MLEC), announced on Monday by Citigroup, Bank of America and JPMorgan, could be up and running within 3 months. According to FT reporters, "The plan is an attempt to address concerns about SIVs and conduits, vehicles that are often off-balance sheet but closely affiliated to banks. They typically fund themselves in the short-term asset-backed commercial paper market but purchase long-term securities". [Gillian Tett, Krishna Guha & David Wighton: "Banks agree $75bn mortgage debt fund", Financial Times].

[4] Brad Setser on Chinese reserve growth. Brad Setser detects a $45-$50bn shortfall in valuation-adjusted Chinese reserves. His hypothesis: the Chinese are beefing up their Sovereign Wealth Fund: "I would estimate that $50b was shifted to the CIC". Brad's hypothesis raises an important question for liquidity watchers: can we rely solely on quantity indicators? My own answer would be: watch market-based indicators such as credit spreads and volatility readings. Or, in this blog's terminology: pay slightly more attention to "endogenous" liquidity indicators, and slightly less attention to monetary aggregates. [Brad Setser: "Why did China only add $100b to its fx reserves in the third quarter?", RGE Monitor].

Friday, October 12, 2007

. Federal Reserve: "Factors Affecting Reserve Balances", October 10

- Fed's Treasuries holdings: $783.3bn (-$3.0bn)
- Other central banks' Treasuries holdings: $1,221.8bn (+$7.7bn) (*)
- Other central banks' agency securities: $782.0 (-$2.3bn) (*)
- Global Dollar Liquidity Measure: $2,787.2bn (+$2.5bn)

(*) Off-balance-sheet items

Dull, lacking in liveliness or surprise, uninteresting, colorless and boring: these are the adjectives that best describe the weekly Fed balance sheet. And this has been the norm for months now. There is, I believe, a simple explanation: the real action is taking place ... elsewhere. When you read about liquidity crisis and/or surging current account deficits in the periphery of the eurozone, and when you see the euro trading above $1.42, you know the ECB is getting all the fun (or the stress). It's high time for a Global Euro Liquidity measure! Meanwhile, here's my daily liquidity roundup:

[1] Morgan Stanley: an October pause? "The combination of healing in stressed financial markets and mixed economic news", write Richard Berner and David Greenlaw, "gives the Fed latitude to pause before easing monetary policy again. Since the Fed eased on September 18, the improvement in most markets has been dramatic, although incomplete. As the Fed intended, that improvement has partially offset the financial restraint from the summer liquidity squeeze". [Richard Berner & David Greenlaw: "Fed to Pause in October", Morgan Stanley GEF].

[2] South Africa Reserve Bank raises rates. South African Reserve Bank Governor Tito Mboweni said on Thursday that the bank had decided to raise the repo rate by 50 basis points to 10.5%. The current tightening cycle that began in June last year increases to 350 basis points. Is this the end of the tightening cycle? [Mail & Guardian: "
Reserve Bank raises interest rates"].

[3] Liquidity @ Financial Times. Fred Bergsten on Asia & the euro: "... eurozone leaders should be addressing their concerns to Beijing, and to some extent Tokyo and Riyadh, rather than Washington, especially with the US current account deficit now falling and the budget deficit for fiscal 2007 at a mere 1.2 per cent of GDP" ("
Europe must look east to deal with the euro"); Gillian Tett on the impact of volatility on VAR models (no link); Stacy-Marie Ishmael on a tentative recovery in the junk-rated bond market ("Appetite for high-yield debt improves"); Michael Mackenzie & Sakia Scholtes on the high levels of 3-month interbank rates (no link).

Thursday, October 11, 2007

[Latest Global Dollar Liquidity measure: +14.1% annual growth rate; latest Endogenous Liquidity Index: -11.3%]

Steen Jakobsen, the Saxo Bank asset manager, is now posting his positions on his blog. Latest trades:

EURNOK - Long @ 7.6951 (15% of net value of fund); EURSEK - We remain short from 9.2017 & 9.1781 (30%); NOKSEK- short 1.1877 (19%); JPY c USD p, strike 116, Price 41 pips (Net risk 10 bps); Dec Dax- short 8.055,50 (16%); 10y Notes (dec) - Long 108 23.5/32 (37%).
[Latest Global Dollar Liquidity measure: +14.1% annual growth rate; latest Endogenous Liquidity Index: -11.3%]

Liquidity as a state of mind; Bank Credit Analyst & Goldilocks; bearish David Malpass; liquidity @ Financial Times; Endogenous Liquidity watch.

[1] Liquidity is a state of mind! PIMCO's Paul McCulley unearths good old Keynes and posts a timely reminder: "Liquidity is not a pool of money, but rather a state of mind ... At the macro (systemic) level, liquidity is not about how many pieces of paper with pictures of dead presidents on them we have in our wallets, but rather about how much utility we derive from having them in our wallets". Bingo! McCulley's point, IMHO, is sometimes neglected by international reserves analysts, who fail to notice that central banks's purchases of U.S. securitires reflect local residents' confidence about taking risks in their own currencies. As governor Warsh says: "Liquidity is confidence". [Paul McCulley: "A Reverse Minsky Journey", PIMCO Bonds].

[2] Bank Credit Analyst: Just enough liquidity. "The global economy is on a Goldilocks path: Just enough liquidity and just enough growth", writes the top-notch Canadian consultant. These guys have an astonishing track record. But what does our own Goldilocks/Stagflation indicator say? The good news is that the numerator is on fire: yesterday, platinum prices surged $30, and the platinum/gold ratio (a market-based indicator of global economic growth) trades at 1.88, a 40-day high. No such luck in terms of the denominator, though: ten-year inflation breakevens are back above 230 basis points. All in all, a rather decent picture. [Bank Credit Analyst: "Commodities: Just Right"]

[3] Bearish Malpass? Bear Stearns chief economist David Malpass is feeling less bullish about the prospects for the global economy and risky assets: "The momentum in many asset classes has been a byproduct of prolonged excess liquidity provided by the Fed. Clear signals of a slowdown in global economic growth are needed to break the momentum". [Doug Kass: "Six Reasons a Noted Economist Is Less Bullish", The].

[4] Liquidity @ Financial Times: China. The FT special report on China provides tons of information: "In China, the loosening of rules on home purchases kick-started the mortgage process and gave ordinary citizens a hefty chunk of collateral to finance other big-ticket purchases". Right in the money! Secure property rights tend to produce explosive moves in credit markets, as the value of trillions in assets is unlocked. Previously dormant assets become liquid assets, ready to act as collateral in credit markets. See Hernando de Soto: The Mystery of Capital. Why Capitalism Triumphs in the West and Fails Everywhere Else (Basic Books: 2000). [Lionel Barber: "A 21st century narrative with many contradictions", Financial Times].

[5] Liquidity @ Financial Times: the ECB's burden. More on the ECB's burden: financial crisis at the periphery of the system lead to unwanted bouts of currency appreciation (the euro, in this case). "Russia’s central bank is to lower minimum reserve requirements for banks from Thursday as it battles a growing liquidity squeeze in the Russian banking system following the US subprime crisis. The decision comes as part of a number of measures designed to fend off a potential liquidity crisis during the next few months ... There isn’t enough funds available to support normal operations so the banks need to borrow every day via repo operations ... Renaissance Capital calculates $7.15bn in eurobond issues and about Rbs40bn [$1.5bn] in ruble bond issues have been postponed since the crisis hit". Affaire à suivre. [Catherine Belton: "Russia cuts bank reserve requirements", Financial Times].

[6] Endogenous Liquidity watch. Good news on the ELI front. Thanks to the rapidly shrinking Moody's Baa spread (190 bps), my trusted long-term model for risky assets in now back into a bullish mode. Caveats apply: the model is all but useless as a short-term trading tool, and the margin is very, very slight.

Wednesday, October 10, 2007

[Latest Global Dollar Liquidity measure: +14.1% annual growth rate; latest Endogenous Liquidity Index: -10.7%]

Domestic v. global liquidity; McKinsey & petrodollars; Governor Warsh on liquidity & market-based indicators; amazing Larry Kudlow; a look at the Endogenous Liquidity Index; liquidity @ Financial Times.

[1] Domestic v. global liquidity. John Husman does a good job at debunking one of today's most persistent myths, namely that the Fed is "inundating" markets with liquidity. This is certainly not the case: "... investors are putting so much false hope on the notion that the Fed is 'injecting' all sorts of 'liquidity' into the markets". My own numbers show that the stock of Treasury securities held by the Fed is growing at around ... 3%. Moreover, Husman hits the nail on the head as he mentions foreign holdings of U.S. bonds: "Foreign purchases of U.S. Treasuries outweigh the Fed's actions many, many times over". Yet, one is left with the impression that Dr. Husman pays perhaps too much attention to (anemic) domestic liquidity, and not enough attention to (booming) global dollar liquidity. [John P. Husman: "The Bag Will Not Inflate, And Liquidity Will Not Be Flowing", Husman Funds Weekly Market Comment] [HT: JJ].

[2] McKinsey & petrodollars. Bloomberg's Daniel Kruger cites a McKinsey report on the impact of petrodollars in terms of the U.S. credit markets: "Oil exporters eclipsed Asian nations last year as the biggest source of global capital for the first time since the 1970s, McKinsey found. At $70 a barrel, $628 billion of fresh petrodollars will flood through global financial markets yearly". Here's the really important part: "Yields on 10-year notes are 21 basis points lower because of the additional petrodollar reinvestment". That sounds about right to me. The essence of Bretton Woods-type models is to avoid adjustment through the recycling of savings carried out by surplus countries. [Daniel Kruger: "Treasuries Fueled by Petrodollars From Mideast Funds", Bloomberg].

[3] Governor Warsh & market price indicators. Liquidity analysis isn't always concerned with quantity indicators (monetary aggregates). Market prices provide an alternative route — especially in times of crisis. That is the key lesson from the already aged, but wonderful book by Manuel Johnson & Robert Keleher. Monetary Policy. A Market Price Approach (Westport, Connecticut: Quorum Books, 1996). Fed governor Kevin Warsh appears to agree: "Particularly in times of financial distress, we must draw on a full range of market indicators ... Signs of illiquidity were evident in a number of important markets ... In this respect, market-based indicators are certainly informative". All sorts of spreads are taken into consideration. But note the conspicuous absence of ... FX markets. [Kevin Warsh: "Financial Stability and the Federal Reserve", Federal Reserve Board].

[4] Amazing Larry Kudlow. CNBC's Larry Kudlow and an astonishing piece on Ben Bernanke's "liquidity flip-flop": "On the afternoon of August 7, the Federal Reserve chair was an inflation hawk — according to the unchanged FOMC policy statement — fearful of adding liquidity to the markets. By day’s end on August 9, however, he was leading the liquidity charge, initiating a process that would help unlock the credit seize-up that started in late-July ... And he got the liquidity ball rolling. As we now know, the Fed started pouring liquidity into the system on August 9. Then, on August 17, it slashed its base discount rate for member-bank loans by 50 basis points. Finally, on September 18, it enacted a shock-and-awe liquidity-adding half-point drop in the federal funds rate". [Larry Kudlow: "Anatomy of a Fabulous Fed Flip-Flop", National Review Online].

[5] Endogenous Liquidity watch. Our Endogenous Liquidity Index surged 4.2% yesterday, spurred by the falling VIX, by tightening CDS spreads, and by surging share prices of financial innovators (Goldman Sachs at a new all-time high).

[6] Liquidity @ Financial Times: John Plender. The former FT editor, now chairman of Quintain, argues vehemently in favor of incorporating liquidity risk into the next Basel regulatory round: "Bill Cuthbert of Liquidatum, an advisory and data services firm specialising in liquidity risk, points out that liquidity risk has become the poor cousin of other types of risk. A survey by his firm of the annual reports of 59 of the world's biggest banks shows that liquidity risk is consistently granted much fewer mentions than market risk, credit risk and operational risk". Mr. Plender mentions the L-word no less tan ... eleven times (a new record) [John Plender: "Let's not forget to mention liquidity risk at the Basel round", Financial Times].

[7] Liquidity @ Financial Times: Kazakhstan. Remember the ECB's burden? Now things are taking a spectacular turn. Banking systems at the periphery of the eurozone are getting shaky; local investors rush to protect their property by buying ... euros! The euro appreciates, and politicians in Brussels complain. Dear ECB: welcome to the not-always-pleasant world of the issuers of international reserve currencies! (More on that soon) [Joanna Chung and Stacy-Marie Ishmael: "Kazakhstan hit hard by the shortage of liquidity", Financial Times].

[More updates coming up].

Tuesday, October 9, 2007

[Latest Global Dollar Liquidity measure: +14.1% annual growth rate; latest Endogenous Liquidity Index: -14.3%]

The ECB's burden; liquidity & entrepreneurship; liquidity @ Financial Times: Lagarde, Magnus, Lex.

[1] The ECB's burden. The European Central Bank is discovering the pitfalls of managing an international reserve currency. Ten years ago, surging demand for dollars worldwide baffled the Fed and led to a memorable debate within the FOMC. Monetarists, led by Bill Poole and Jerry Jordan, worried about surging M2 and M3 aggregates, and wished to raise rates. "Internationalists" argued that a global flight-to-quality move was artificially swelling money market funds within M2 and M3. They insisted on lowering the Fed funds target to ease the panic. Now, the ECB is grappling with similar issues: "... the August annual growth rate of close to 12% in the monetary aggregate M3 may have been influenced by a number of temporary or special factors, such as the flattening of the yield curve and the recent financial market volatility, and may therefore overstate the underlying rate of money and credit expansion". Fascinating stuff. [Jean Claude Trichet: "Introductory statement", ECB].

[2] Liquidity & entrepreneurship. Hans Hvide, a professor of finance at the University of Aberdeen, proposes a simple model to test an idea that can be traced back to Adam Smith, who in the Wealth of Nations stated that entrepreneurs: "... have all the knowledge, in short, that is necessary for a great merchant, which nothing hinders him from becoming but the want of sufficient capital." Overall, the model tends to support the view that "entrepreneurs may be unable to establish a venture at an efficient scale due to liquidity-constraints arising from capital market imperfections" [Hans Hvide: "Does lack of liquidity impair entrepreneurs?", VOX].

[3] Liquidity @ Financial Times: Christine Lagarde. The French minister of economy and finance —who recently argued in favor of a "semi-incestuous relationship between the exchanges, bankers, insurers, lawyers and accountants"— calls for a better assessment of liquidity risk by rating agencies: " ... the liquidity of secondary markets for such complex securities can disappear very quickly. Both rating agencies and investors should be able to assess this liquidity risk. Rating agencies should enhance their methodology for assessing structured products so as to capture liquidity risks". The L-word is mentioned no less than five times. [Christine Lagarde: "Securitisation must lose the excesses of youth", Financial Times].

[4] Liquidity @ Financial Times: George Magnus. The UBS Investment Bank advisor warns readers that the credit crisis is not over yet: "The scramble for liquidity is still ongoing, as evidenced by euro interbank rates, which are still hitting new highs". Mr. Magnus doesn't buy into the notion that BRICs-led "global decoupling" will be enough to offset the upcoming slowdown in OECD economies. For my part, as I have stated repeatedly, I'll keep an eye on volatility readings to gauge the validity of the decoupling thesis. So far, the verdict is largely a positive one. [George Magnus: "
The credit crisis: why it is still too early to relax", Financial Times].

[5] Liquidity @ Financial Times: Lex. There is little need for another rate cut from the Fed, says Lex: "Last time round, the Fed delighted unsure investors with 25 basis points more than expected. This month, it might be time to remind them that while helicopter Ben has shown he will take off in an emergency, he does not simply hover over the markets unleashing cheaper money on demand". [Lex: "The first cut is the deepest", Financial Times]

[6] Liquidity @ Financial Times: Islamic bonds. This is a truly worrying piece of news. Islamic finance, one of the global credit market's bright spots, now looks vulnerable to the West's credit problems: "Dana Gas, a Middle Eastern natural gas producer, was on Monday forced to lower the size of an Islamic bond issue and offer investors bigger premiums as the credit squeeze took its toll on one of the fastest-growing sectors of the market.
The United Arab Emirates company finally raised $875m with a coupon (or profit rate) of 7.5 per cent. However, the company had initially hoped to raise $1bn with a premium of between 6.5 per cent and 7.25 per cent". [David Oakley: "Dana Gas trims Islamic bond issue", Financial Times].

[7] Liquidity @ Financial Times: the dollar & the adjustment burden. Alan Ruskin, chief international strategist at RBS Greenwich Capital, writes that massive FX intervention by emerging market countries "has shifted much of the adjustment burden of the weaker dollar to the more flexible 'major' currencies". This is precisely the 'magic' of a Bretton Woods-style monetary system: the issuer of the reserve currency enjoys the (temporary, and ultimately self-defeating) benefit of deficits without tears, as Jacques Rueff, Charles de Gaulle's economic advisor, used to describe it in the 1960s. [Alan Ruskin: "Beware moral hazard that has encouraged a weak dollar", Financial Times].

Friday, October 5, 2007

. Federal Reserve: "Factors Affecting Reserve Balances", October 3

- Fed's Treasuries holdings: $786.3bn (+$2.7bn)
- Other central banks' Treasuries holdings: $1,214.1bn (-$0.7bn) (*)
- Other central banks' agency securities: $784.3 (+$3.9bn) (*)
- Global Dollar Liquidity Measure: $2,784.7bn (+$5.8bn)

(*) Off-balance-sheet items

The week ends with a modest (+$5.8bn) increase in our Global Dollar Liquidity measure. The annual rate of growth rose half a percentage point to 14.1%. The message I take away from October's first weekly Fed balance sheet is that the global economy continues to act as an ... oasis of prosperity. Custody holdings are back at +19%, a bullish sign. However, comparisons will only get tougher as 2008 approaches: the same applies to credit spreads and to our models for risky assets (and to corporate profits for that matter). The truth is that, for all the brouhaha surrounding the credit squeeze, the S&P500 is back to its mid-July level. Trading range, anyone?

Thursday, October 4, 2007

[Latest Global Dollar Liquidity Measure: +13.6% annual growth rate; latest Endogenous Liquidity Index: -16.9%]

Liquidity is priceless; Brad Setser on central bank reserves; Vietnam & the dollar; China's economy & the global business cycle; daily Endogenous Liquidity watch.

[1] Liquidity is priceless! The Financial Times's John Gapper draws "Three lessons from the credit squeeze". One such lesson is that "liquidity is priceless". Here's Mr. Gapper: "Until August ... liquidity was free. You could get liquidity at the local drug store ... This, however, was an illusion. Although there was still money around in August and September – deposits were flowing into Treasury bonds and money market funds – the tap turned off in the interbank market. 'Liquidity is a very tricky risk to manage', says James Wiener, a managing director at the financial consultancy, Oliver Wyman. 'Many times, there is either an abundance or a complete lack of it'. In the latter times, financial institutions rediscover that liquidity is priceless, first because they are unable to obtain funding at all and second because everything else follows from it. An illiquid broker or bank is potentially a bankrupt one; no matter how much its assets are worth, or may be worth in the future, it must jettison them at fire-sale prices to stave off collapse".

[2] Brad Setser on central bank reserves. Another long and well thought out piece from Brad Setser, the doyen of central bank reserve analysis. ("Central banks came close to financing the entire US current account deficit"). Brad contends that "all the heavy lifting required to finance the US external deficit is being done by the world's central banks". The relative paucity of private flows worries him. But one could also argue that central banks' actions are merely reflecting investors' willingness to hold yuan, won, roubles, reals, pesos, etc. This all but forces foreign CBs to buy more treasury and agency securities. In other words, it would be like the Asian crisis in reverse: a show of confidence in local currencies.

[3] Vietnam & the dollar. Über-bear Ambrose Evans-Pritchard is at it again ("Dollar's double blow from Vietnam and Qatar", Telegraph). The Vietnamese central bank, apparently, has had it with the New Bretton Woods: "The Saigon Times said this morning that the State Bank of Vietnam was abandoning the attempt to hold down the Vietnamese currency through heavy purchases of dollars. The policy is causing the economy to overheat, driving up inflation to 8.8pc". Fellow bear Hans Redeker is cited: "Vietnam is a relatively small country but it is symptomatic of Asia. The entire region is seeing inflation move up as a result of mercantilist policies of holding down their currencies with 'dirty floats', which are designed to help their export sectors". It will be interesting to see how the Vietnamese manage the transition from an exporting periphery to a centre of growth and innovation.

[4] China's economy & the global business cycle. "The fate of the world economy", says The Economist, "now hinges not just on America, but also on China's economic fitness continuing over at least the next two years" ("How fit is the panda?"). Let me add one thing: the fate of endogenous liquidity is also at stake. A balanced global economic cycle, with strong growth from China somehow compensating for G7 weakness, would reduce financial volatility and hence boost market liquidity. The Economist then quotes Tao Wang, Bank of America's economist in Beijing, who "is optimistic about China's economy in the short term and the long term, but thinks the medium term looks risky". I fully agree with that view.

[5] Endogenous Liquidity Watch. Our Endogenous Liquidity Index eased slightly yesterday (-0.22%). Once again, the impact of mildly higher volatility readings was held in check by falling CDS spreads. Nothing to write home about, really. The index is acting in a less volatile fashion, which may indicate, as a Lehman Brothers analyst puts it, that "The credit machine is slowly restarting".

UPDATE: Bank of England mantains the official bank rate at 5.75% [communiqué]; European Central Bank leaves key rates unchanged (4.00%) [statement].

Wednesday, October 3, 2007

[Latest Global Dollar Liquidity Measure: +13.6% annual growth rate; latest Endogenous Liquidity Index: -16.7%]

Mishkin on globalization; El-Erian on Sovereign Wealth Funds; Bank Credit Analyst: "Sell yen!"; Endogenous Liquidity Watch.

[1] Fed Governor Mishkin on globalization. Does globalization lead to a more stable global economy? The jury is still out, says Mishkin: "Increasing global diversification lowers the likelihood that financial shocks will be concentrated in individual economies and thus lead to economic downturns ... However, as I have also emphasized in my work, financial globalization makes it easier for capital inflows to fuel excessive risk-taking on the part of financial institutions and allows financial shocks to be transmitted more readily across borders". ("Globalization, Macroeconomic Performance, and Monetary Policy"). The bottom line, in terms of liquidity analysis: keep an eye on financial volatility measures.

[2] El-Erian on SWFs. Mohamed El-Erian, the former and upcoming PIMCO executive, believes that "the US economy will slow substantially but not contract and that the rest of the world will continue gradually to decouple in a healthy manner". ("Foreign capital must not be blocked", Financial Times.) On the subject of Sovereign Wealth Funds, he adds: "In past systemic crises, the official sector has welcomed injections of liquidity from other sources while repairs were being undertaken. After all, such liquidity serves to facilitate adjustments occasioned by market dislocations".

[3] Bank Credit Analyst: sell yen! The top-notch Canadian consultant advises clients to play the yen carry trade – the prudent way: by selling the Japanese currency against the Swiss franc and the Singapore dollar.

[4] Endogenous Liquidity Watch. Our Endogenous Liquidity Index is little changed, as rising volatility measures (well done, Bill Luby!) are checked by falling CDS spreads and other components. Note that the Moody's Baa spread trades below 200 bps for the first time since mid-August, a bullish development in terms of my long-term model for risky assets.

Tuesday, October 2, 2007

[Latest Global Dollar Liquidity Measure: +13.4% annual growth rate; latest Endogenous Liquidity Index: -17.0%]

There is little doubt that BRICs are, right now, an oasis of prosperity. As Macro Man recently wrote: "That the SPX is up this week despite a pretty unambiguously poor set of macro data is a testament to the importance of liquidity and globalization in driving asset prices". But how can we gauge the impact of globalization and liquidity? First, look at the stock of Treasury and agency securities held by foreign central banks. It's growing at 18.6% rate. Hot! Then, pay attention to financial volatility measures (VIX, VXN, V-DAX, etc.) Declining financial volatility would be a pretty good indication that global decoupling is indeed taking place.

Monday, October 1, 2007

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

Slow growth of the monetary base; on global decoupling; Bill Gross' October "Investment Outlook"; Endogenous Liquidity Watch.

[1] Slow growth of the monetary base. While reflecting on the anemic growth rate of the stock of treasuries held by the Federal Reserve (+2.5%), I came across this analysis of the monetary base (commercial banks' deposits at the Fed + currency) [HT: Big Picture]. Is the Fed's stance too restrictive here? Why is the dollar making new lows? Questions, questions (chart).

[2] Global decoupling? Volatility as the key "tell". Remember Alan Greenspan's 1998 "oasis of prosperity" speech? Now PIMCO's Paul McCulley asks the same question, but in reverse: "Can the world remain an oasis of prosperity while the United States sinks deeper and deeper into the post-housing bubble morass?" ("
Cyclical Outlook and Investment Strategy"). Volatility indicators, IMHO, will be the key "tell" here (see Bill Luby on volatility measures).

[3] Bill Gross's October Investment Outlook is out. The always important and readable
Investment Outlook from the PIMCO boss is out. The key part: "Should Bernanke put on a brave face and freeze the elevator and rates in mid-descent, he risks exacerbating a housing crisis in the making. Yet, should he favor the homeowner over the corporation, he risks reigniting speculative equity market behavior, and – in addition – a run on the dollar ... PIMCO’s view is that a U.S. Fed easing cycle historically has required a destination of 1% real short rates or lower. Under a conservative assumption of 2½% inflation, that implies Fed Funds at 3¾% or so over the next 6-12 months".

[4] Endogenous Liquidity Watch. Our Endogenous Liquidity Index eased 1.6% on Friday, but still managed to close slightly higher on the week. All components showed weakness. Note, however, that the Moody's Baa spread is once again toying with 200 bps. With our Global Dollar Liquidity measure growing at a 13.6% clip, a slight decline in that spread would take our trusted long-term model for risky assets back into bullish territory. Meanwhile, the trading range scenario persists.