Tuesday, November 20, 2007

[Latest Global Dollar Liquidity measure: +14.1% annual growth rate; latest Endogenous Liquidity Index: -32.2%]

The dollar and ... the VIX; more stagflation talk.

[1] The dollar & the VIX. The euro is, in all likelihood, headed towards its $1.50/1.52 target. Talk shows and newspapers are full of stories about an impending US recession, a global financial crash, a major financial institution going under, and so on. Yet the VIX, which only managed to register a 2% gain, will likely come under pressure today. Am I missing something here? Ladies & gentlemen: I am now officially embracing the Benign Global Adjustment Theory (BGAT). This is how Morgan Stanley's Stephen Jen puts it: "What is happening to the global economy is quite healthy. The US household savings rate is likely to recover sharply over the near year, as housing wealth is eroded. We are witnessing the necessary and sufficient ingredients for global rebalancing, which should not elicit confusion or fear".

Earlier this month, in a Financial Times piece on the "silver lining in America's subprime cloud", George Schultz and John Taylor summarized the "three-pronged" strategy underlying the adjustment process: "reducing the US budget deficit to decrease government dissaving, raising economic growth abroad relative to the US in order to stimulate US exports and increasing the flexibility of exchange rates, especially in China, to facilitate the adjustment". An earlier version of the benign adjustment theory had been expressed by Alan Greenspan: "Should globalization be allowed to proceed and thereby create an ever more flexible international financial system, history suggests that current imbalances will be defused with little disruption. And if other currencies, such as the euro, emerge to share the dollar's role as a global reserve currency, that process, too, is likely to be benign".

This is not the 1970s redux. There's Chindia. There are alternatives to the dollar. And the world is embracing capitalism: Africa is rapidly becoming the new frontier — and even North Korea is developping a "fledging merchant class". [Stephen Jen: "The Undervalued Dollar To Keep Weakening", GEM] George Shultz & John Taylor: "The silver lining in America’s subprime cloud", Financial Times] [Alan Greenspan: "Bundesbank Lecture 2004"]

[2] More stagflation talk [Liquidity @ Financial Times]. More ruminations on the stagflation scenario. Here's Paul Ashworth of Capital Economics: "... the price of petrol at the pumps has already risen past $3 a gallon; if crude prices remain near $100 a barrel, it could reach $3.60 before too long ... The resulting squeeze on real incomes couldn't have come at a worse time, with the credit crunch, the downturn in housing and a softening labour market all pointing to slowing consumption growth". This is something we monitor on a daily basis at the Global Liquidity Blog. Our market-based "Goldilocks-Stagflation" indicator improved further yesterday, led by a higher platinum-gold ratio. ["View of the Day - Paul Ashworth, Capital Economics", Financial Times]


Anonymous said...

What are these numbers? Where do they come from? Links to definitions/sources would be great:

[Latest Global Dollar Liquidity measure: +14.1% annual growth rate; latest Endogenous Liquidity Index: -32.7%]

Agustin said...

Global Dollar Liquidity = stock of Treasury securities held by the Fed + Foreign central banks' stock of Treasury and Agency securities held in custody at the New York Fed. (See review of the weekly balance sheet, usually on Fridays).

The Endogenous Liquidity Index is a proprietary measure of "market liquidity". It includes CDS spreads, Moody's Aaa and Baa spreads, junk bond spreads, volatility measures (VIX & others), the policy rate spread between the dollar and the yen (a proxy for the carry trade), and market-based proxies for finanacial innovation (GS share price, etc.) Cheers.