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.


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