Thursday, February 7, 2008

[Latest Global Dollar Liquidity measure: +11.4% annual growth rate; latest Endogenous Liquidity Index: -45.4%]

Not seen since March 2003: the Moody's Baa spread relative to 10-year Treasuries trades at just over 300 bps. Watch out for a massive blow to corporate earnings.


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Economics Student said...

About the credit situation you described on your methodology entry, I want to ask:

Is the trade surplus (e.g. China) reinvested back to US Treasuries today? Is USD overvalued, as a result? Is there a dangerous financial bubble now?

Agustin said...

Charls: you're in!

Economics student: that's exactly one way to look at it! When China invests in US Treasuries, it does exactly what Dr. Rueff had in mind. Now, the dollar has fallen quite sharply, and the real estate bubble is in trouble... The model has proven very useful, but --just like any other model-- it has its limitations. Cheers.

Economics Student said...

Thank you for taking the time to answer my questions...

I am studying economics(fourth year already), but I am frustrated about the subject of "liquidity" is not explained clearly in college (maybe it is my problem).

Can you suggest some background readings for me? about Money, banking, liquidity???

And, I enjoy your blog very much !!

Agustin said...

Here's one excelent reference on the subject of liquidity & central banks.

Manuel Johnson & Robert Keleher: Monetary Policy. A Market Price Approach (Westport: Quorum Books, 1996).

It is already a bit old, and it shows: if written today, it would include more references to things like CDS, the VIX, etc. But the book does an EXTRAORDINARY job at explaining currency & FX markets, and the crucial link between the bank rate (a.k.a as the fed funds rate) and long bonds. The treatment is very different from conventional textbooks. Enjoy!

Oliver said...

why do you say this will be a blow to corp earnings?