Tuesday, December 11, 2007

[Latest Global Dollar Liquidity measure: +12.7% annual growth rate; latest Endogenous Liquidity Index: -28.7%]

- Liquidity @ Financial Times: liquidity & transparency. Larry Tabb makes a good point about the lack of transparency in the OTC debt market: "So what would happen if by fiat – or, more likely, by some government act – the asset-backed (or other OTC) market were to become listed overnight? Liquidity would dry up and pricing would be more volatile. The reason OTC markets tend to be OTC is that there is not enough liquidity provided by 'the general market' to enable buyers and sellers to execute without the aid of large-broker capital". [Larry Tabb: "Market insight: Transparency would muddy OTC waters", Financial Times]

- Endogenous Liquidity watch. Our Endogenous Liquidity Index is up 12.9% since its November 26 low. This stellar performance was led by the falling VIX; I view it as a sign that the "Great Moderation" of the business cycle is alive and well. Spreads on Credit Default Swaps and on high yield bonds are also sharply lower. But note the discrepancy with Moody's Aaa and Baa spreads, which continue to surge. What is going on? Long-time spreads watcher Ken Fisher is not worried: according to Forbes' Rich Karlgaard, Mr. Fisher emphasized the (bullish) fact that "Triple-A-rated companies can borrow at lower rates than they could six months ago". (This is true). Note, also, the very bullish fall in 10-year inflation breakevens (225 bps), which are fast approaching late August lows. Here, the FOMC will likely have an impact. [Rich Karlgaard: "Three Bulls Walk Into A Forbes Cruise", Forbes Digital Rules]

- Liquidity @ Financial Times: Bullish Pictet Asset Management. John-Paul Smith, chief strategist at Pictet Asset Management, describes himself as a value-based investor with a strong contrarian streak. I like that — and I like his views on the dollar and on commodities. Mr. Smith thinks the dollar will recover "once investors realise that the long-term prognosis for the US economy is actually very good, as evidenced by its high productivity and positive demographic trends". On the subject of commodities, he thinks that the "intellectual foundations of the commodity boom are pretty shaky", and that "there is a tendency over the very long-term of real commodity prices to decline". Given the not-so-hot rate of growth of the Global Dollar Liquidity measure, and the related collapse in US monetary base growth, I tend to agree with Mr. Smith. [John-Paul Smith: "Investors should shut their ears to the bears", Financial Times]

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