GLOBAL LIQUIDITY WATCH
[Latest Global Dollar Liquidity measure: +14.1% annual growth rate; latest Endogenous Liquidity Index: -30.6%]

- Endogenous Liquidity Watch. Another punishing session yesterday, as volatility measures, bond spreads and CDS spreads again closed sharply up. The Moody's Baa spread, in particular, trades at a new record for the year (218 bps). In all likelyhood, my trusted long-term model for risky assets will flash a sell signal for the fourth month in a row. On a slightly more encouraging note, the platinum-gold ratio is again trading above 1.80, while 10-year inflation breakevens are stabilizing around 240 bps. On the basis of that "Goldilocks-Stagflation" indicator, the S&P500 appears to be fairly valued at 1450.

- Liquidity @ Financial Times. [1] Renewed stress on interbank lending: Two-month sterling at a two-month high; overnight dollar libor up; Barclays unveils a £1.3bn writedown (Dave Shellock: "Mixed data and tight liquidity"). [2] Mark-to-market & subprime losses: the current crisis compared with other episodes (Gillian Tett: "Fog and fear obscure the reality behind subprime losses"). [3] The United Arab Emirates & the dollar peg: increased speculation that the UAE favor a move to drop the dollar peg and track a basket of currencies instead. Bring it on! (Peter Garnham: "Gulf states’ dollar peg comes under threat"). [4] Citigroups' funding woes: "In a further sign of falling confidence in the bank, it now costs more to insure its bonds against default in credit derivatives than it does for emerging market countries such as Mexico and Malaysia" (David Oakley: "Citigroup’s lending charges shoot up"). [5] China & US: China warns exporters could be 'devastated' by US slowdown. "China's central bank estimates that every 1 per cent drop in US economic growth translates into a 6 per cent fall in Chinese exports" (Jamil Anderlini: "China warns exporters 'could be devastated' by US slowdown").

- ECB Monthly Bulletin: not a pretty picture. [1] Growth v. inflation dynamics: "On balance, risks to the outlook for growth are judged to lie on the downside ... Risks to the medium-term outlook for price developments are fully confirmed to lie on the upside". Not good! [2] Financial volatility: "... in view of the potential impact of prolonged financial market volatility and the re-pricing of risk on the real economy, the level of uncertainty remains high"; [3] Monetary growth: influenced by "temporary or special factors" (read: flight-to-quality buying of euro-denominated money market funds, mostly from the eurozone's periphery), but still too strong for comfort. [Editorial] [full text pdf] [Ralph Atkins: "Rapid food price rises fuel inflation fears, ECB warns", Financial Times].