Thursday, October 11, 2007

[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.

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