Friday, December 28, 2007

. Federal Reserve: "Factors Affecting Reserve Balances", December 26

- Fed's Treasuries holdings: $775.0bn (-$13.4bn)
- Other central banks' Treasuries holdings: $1,226.2bn (+$1.6bn) (*)
- Other central banks' agency securities: $830.2 (+$7.0bn) (*)
- Global Dollar Liquidity Measure: $2,831.4bn (-$4.5bn)

(*) Off-balance-sheet items

As the year draws to an end, one question remains unanswered: will the dichotomy between strong funding liquidity and weak market liquidity persist? Let me put it this way: what could cause my trusted long-term model for risky assets to flash a "buy" signal? (The model combines the rate of change of the inverse of the Moody's Baa spread and the rate of change of the Global Dollar Liquidity measure; it finds itself in mildly bearish territory since August). The math shows that spreads would need to fall about 70 bps; alternatively, funding liquidity would need to explode (+37%). None of this portrays a likely scenario, even with central banks easing aggressively. My own guess is that my model has become skewed to the bearish side, because it does not adequately reflect (among other components of market liquidity) the growing impact of the "Great Moderation" of the business cycle. Here, the VIX and other volatility indicators have a key role to play — and their recent performance is indeed encouraging. Bottom line, my friends: while I'm busy re-calibrating my models, I just don't see how risky asset markets could break out of their 2007 trading range any time soon.


Nick said...


I am checking on Russia's money supply. I am seeing a 50%+ YoY growth in both M0 and M2, and a hugh increase in currency reserve. Comparing with a 7.4% GDP growth, it seems that this is way out of line.?

Do you track Russia's Money Supply?
Is this bullish for Russia's equity, which is now trading at 13xPE, one of the cheapest among the emerging markets?
Or is it bearish because of a lack of discipine of monetary policy?

A thousand thank you in advance.

Agustin said...


In do not follow Russia in detail ... I probably should. I tend to see these numbers as a sign of confidence in the economy. But I´ve been wrong on Russia before.

Thai McGreivy said...

Hello liquidity blogger

I came across you blog trying to make intelligent decisions about whether to investing in a Gold ETF symbol GLD. I am a complete novice when it comes to matters of money supply, inflation, "the shadow banking system", etc... (I am not in the finance industry-- but hey, we little guys try the best we can).

Anyway I was wondering if you would be kind enough to recommend a place where as a novice reader I can learn/read a 'reasonable amount' to understand the major things I need to know to make intelligent investment decisions regarding money supply.

I would be grateful for any insight you can give me

Agustin said...

Thai. Sorry for the late answer. Try and They are both quite good. Cheers.