Friday, November 9, 2007

. Federal Reserve: "Factors Affecting Reserve Balances", November 7

- Fed's Treasuries holdings: $785.1bn (+$2.5bn)
- Other central banks' Treasuries holdings: $1,237.2bn (+$5.7bn) (*)
- Other central banks' agency securities: $795.4 (-$5.4bn) (*)
- Global Dollar Liquidity Measure: $2,817.7bn (+$2.8bn)

(*) Off-balance-sheet items

[1] Weekly Fed Balance sheet review: mixed news at best. The first weekly Fed balance sheet for the month of November yields a small gain (+$2.8bn) in terms of the Global Dollar Liquidity measure. A number of foreign central banks may have swapped agency securities for Treasuries, perhaps as part of a flight-to-quality move within their overall custody holdings. The annual rate of growth of the Global Dollar Liquidity measure has fallen sharply to 14.11%. Because tough comparisons lie ahead, central banks must step up to the plate in order for our global liquidity measure to post meaningful gains.

[2] Endogenous Liquidity Watch: a horror movie ... again! So much for the credit wildfire hypothesis. Our Endogenous Liquidity Index (-29.9%) is perilously close to its August 16 all-time low. All components show weakness: CDS and corporate bond spreads, (the inverse of) volatility measures, indicators of financial innovation, etc. Most disquieting of all, the Moody's Baa spread has once again shot up to 210 bps, threatening to match is recent September 12 high of 213 bps. Meanwhile, our market-based "Goldilocks-Stagflation" indicator refuses to improve, as the platinum-gold ratio reaches new lows. (Mercifully, inflation breakeavens appear to be cooling a bit). In other words: even at 1475, the S&P500 does not look particularly cheap.

[3] Commodity prices: a looming correction? Can commodity prices rally in the face of declining measures of funding and market liquidity? While reflecting on the $100-per-barrel-oil-price-hype, I stumbled upon this intriguing post. Steve de Angelis, who travels regularly to Kurdistan, argues that booming trade and investment flows between Turkey and Iraqi Kurdistan have created a dynamic and complex situation. The Turkish government cannot just invade and destroy this economic connectivity: it would be too costly. Say that current oil prices carry a $20 "geo-political" premium. Stories like this, coupled with the overall liquidity situation, make me wonder: Is it time to short the damned thing? [Steve de Angelis: "Kurdistan's Economic Boom and Relations with Turkey", Enterprise Resilience Management Blog; Richard A. Oppel: "Turkish-Bred Prosperity Makes War Less Likely in Iraqi Kurdistan", The New York Times].

No comments: