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.

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