LIQUIDITY WATCH. THE DOLLAR & THE "GOLDILOCKS-STAGFLATION" INDICATOR
[Latest Global Dollar Liquidity measure: +14.6% annual growth rate; latest Endogenous Liquidity Index: -23.7%]

The Goldilocks-Stagflation indicator; buying 10-Year Note Puts; credit recession?

[1] The Dollar & the "Goldilocks-Stagflation" Indicator. The sharp fall in the dollar is taking its toll on our market-based "Goldilocks-Stagflation" indicator. The numerator is the platinum-gold ratio, an indicator of global economic growth. Although platinum prices trade at- or near record highs, gold has climbed even faster. The ratio, which closed at 2.01 in mid-May, trades now at 1.79. On the other hand, the denominator (ten year inflation-breakevens) is back at 241 bps, a level not seen since early July. Again, the weak dollar is the main culprit. Valued against the "Goldilocks-Stagflation" indicator, the S&P500 now looks rather expensive. A sharp correction, both in the euro and the S&P500, would be a ... wonderful thing.

[2] Buying 10-Year Note Puts. Steen Jakobsen, the Saxo Bank fund manager, tells readers of his blog that he is buying 109-50 and 110-50 December puts on the 10-year note futures. In his view, the rapidly falling dollar threatens the inflation outlook: "The 1st reaction before final collapse of the US dollar must be the market taking the long-end of the US higher, based on inflation and weak US dollar. Hence my surprisingly negative view on 10y notes (prices)...."

[3] A confusing piece on a confusing situation. Morgan Stanley economists Richard Berner and David Greenlaw write a confusing piece on a ... very confusing situation! They worry about the global consequences of the credit market turmoil: "... the liquidity squeeze and tighter financial conditions could hobble growth in some key regions abroad, notably in the UK and some liquidity-fueled emerging market economies. ... In fact, the liquidity crunch may claim its next victim in European growth. Our colleague Eric Chaney notes that the US and Europe are both coupled financially by a tightening in lending standards. While the tightening is more severe on this side of the pond, what matters is how European lenders respond and its impact on capital spending" [Richard Berner & David Greenlaw: "The Credit Recession", Morgan Stanley GEF].