Thursday, February 21, 2008

LIQUIDITY NEWS
[Latest Global Dollar Liquidity measure: +11.3% annual growth rate; latest Endogenous Liquidity Index: -45.4%]

[1] Notes yielding less than Bunds. When it comes to the dollar, I fully understand the bearish case and the very negative sentiment that surrounds the greenback. But why are ten-year notes yielding less than Bunds? Speaking on CNBC, an economist at an investment bank sees this as yet another bearish sign for the dollar (yields are lower in the U.S. because growth is weaker, etc). I beg to disagree. The higher Bund yield may be a sign of decreasing relative confidence in ... the euro.

[2] Checks and balances ... again. Readers of this blog are familiar with one of my key convictions: the cost of capital is lower in countries with political checks and balances. There is a micro side to this largely macro story: as I pointed out in December, the success of Goldman Sachs is largely due to its "culture of partnership which entails a high degree of mutual surveillance in the common interest", as John Plender puts it. I'm glad to know that Paul Strebel, Professor at IMD, makes a similar point:

In an industry that can bring down the whole economy and one with technically complex products, the board should include leadership checks and balances, plus a critical mass of industry experts, as at Goldman Sachs and Credit Suisse, who are independent enough to shape management's risk appetite and if necessary tame it by raising the red flag.

Is Prof. Strebel reading the blog?

[3] More stagflation talk. Every now and then, journalists are kind enough to direct our attention to the "growing risk of stagflation" (*). Now, I take this issue rather seriously — that's why I follow the market-based "Goldilocks-Stagflation" indicator. While the indicator took a beating yesterday on the back of higher inflation breakevens and some profit taking in the platinum market, it still confidently points to strong global economic growth with subdued inflation expectations. What a crazy world.

(*) Krishna Guha, Daniel Pimlott & Michael Mackenzie: "New Jump in prices raises worry of US stagflation", Financial Times

2 comments:

philippe van der veken said...

agustin,please explain what is the "Goldilocks-Stagflation" indicator. why do you mesure the ratio paltinum/gold to measure the vigor,and not weakness, of world economy, as you say here ?:"el ratio platino-oro; nos da una idea de la firmeza de la economía mundial"
i do not understand it,
thanks for explanation
the blog is very good.

Agustin said...

Phil. Numerator = platinum price in ounces / gold price in ounces.

Denominator = 10 year note in basis points - 10 year inflation indexed note in basis points.

When the indicator goes up, markets see growth with little inflation (Goldilocks). When the indicator goes down, they see inflation without growth (Stagflation). Cheers, Agustin