LIQUIDITY TALK. NOT ALL MARKET CORRECTIONS ARE CREATED EQUAL (AND THAT'S GOOD NEWS!)
[Latest Global Dollar Liquidity measure: +12.4% annual growth rate; latest Endogenous Liquidity Index: -33.3%]

Stocks not expensive; liquidity @ Financial Times

[1] On market corrections. Not all market corrections are created equal: this truism has been particularly useful in 2007. As one would expect in a trading range environment, rallies in risky assets prices have been followed by sharp corrections. The key question to ask, in my mind, is the following: what happens both in terms of economic growth and inflation expectations as the market corrects? When the S&P500 sold-off in the second week of November, our market-based "Stagflation-Goldilocks" indicator duly followed suit. There was little value in stocks even as they fell in price. By this same measure, the current correction is an altogether different animal. Ten-year inflation breakevens are relatively well behaved, and the platinum-gold ratio has just reached a two-month high, signalling strong global growth. The S&P500 doesn't look particularly expensive here.

[2] Liquidity @ Financial Times: ECB emergency measures. According to the FT, the ECB announced last night that it would offer "unlimited funds at below market interest rates in a special operation to head off a year-end liquidity crisis" (I can't find the link to the ECB website). Appartently, funds injected today will be "mopped up" later on by the central bank. [Ralph Atkins & al: "ECB steps up fight to safeguard liquidity", Financial Times]

[3] Liquidity @ Financial Times: credit creation & vehicular finance. Amid the sometimes sensless gyrations in financial markets, it pays to read articles that put it all in context. As a fan of Joseph Schumpeter (who thought that innovation went hand in hand with 'credit creation'), I was struck by this timely piece on vehicular finance: "... in the past decade, this financial model has changed radically. On the one hand, banks have increasingly started to sell their credit risk to other investment groups, either via direct loan sales or by repackaging loans into bonds; at the same time, regulatory reforms have permitted the banks to reduce the amount of capital that they need to hold against the danger that borrowers default. The net consequence is that the western financial system embraced what Paul Tucker (BoE), has described as the age of 'vehicular finance'. This system has given banks huge incentives to pass on their loans to new vehicles, either by creating these themselves or by sponsoring outside fund managers to run them. The role of such entities in creating credit has increased vastly in the past three years. For example, the asset-backed commercial paper market, which supplies the lion’s share of funding to SIVs and conduits in the form of cheap, short-term cash, saw a step-change in growth at the end of 2004. The volumes of such paper in issue had fluctuated between $600bn and $700bn for at least four years; at the market’s peak this summer they stood at almost $1,200bn". [Gillian Tett & Paul J. Davies: "Out of the shadows. How banking's hidden system broke down", Financial Times]