Monday, November 12, 2007

[Latest Global Dollar Liquidity measure: +14.1% annual growth rate; latest Endogenous Liquidity Index: -31.8%]

Bill Luby's on fire (again); a look at endogenous liquidity; over-hyped geo-political risk?

[1] Liquidity, volatility, Bill Luby! "Liquidity is the inverse of volatility", says Minyanville's Todd Harrison. And that's, IMHO, largely true. That's why I have incorporated the inverse of the VIX (and other financial volatility measures) into the Endogenous Liquidity Index. And that's also, by the way, a view held at the Bank of Canada. Now, Bill Luby follows trends in financial volatility very, very closely indeed. Lately, he has been bearish on the S&P500 and bullish on the VIX. Well done! Bill told me yesterday on his blog: "I'm still bearish and will be looking closely to see if the bulls are able to make any headway in the coming week".

[2] Toying with all-time lows: a look at the Endogenous Liquidity Index. The carnage continues, as volatility creeps up and credit spreads widen even more. The Endogenous Liquidity Index is now down 32%. From the perspective of our market-based "Goldilocks-Stagflation" indicator, things still look pretty bad. Platinum prices fell sharply on Friday, sending the platinum-gold ratio down to 1.73, a three-year low. While inflation breakevens appear to have stabilized somewhat, the S&P500 continues to look rather expensive. In order for the 1450 support to hold, bulls desperately need to see a sharp fall both in the euro and in gold prices.

[3] Over-hyped geo-political risk? Looking for a silver lining somewhere, the overall geo-political picture is showing signs of improvement — which bodes ill for both oil and gold prices in the short to medium term. While I don't claim any particular expertise in that field, I am an avid reader of Thomas Barnett's blog. Dr. Barnett's key insight: connectivity is reshaping the world faster than you think. Gee, he's even calling for a Sino-American strategic alliance! This would be the key to connect the "Gap": Africa, parts the Caribbean, most of the Middle East, North Korea, etc. While that may sound like pipe dreams, consider the following news: (a) The US military is diffusing Washington rhetoric on Iran; (b) Trade and investment flows between Turkey and Iraqi Kurdistan are sharply up; (c) Former Sunni insurgents are collaborating with the U.S. like never before; (d) Iraqi citizens are guiding U.S. troops to arms caches like never before (again); (e) "Talk to Iran", says the former head of the Israeli intelligence agency Mossad. Etc, etc.

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