LIQUIDITY NEWS. MARTIN WOLF & THE BEARISH CASE
[Latest Global Dollar Liquidity measure: +11.3% annual growth rate; latest Endogenous Liquidity Index: -46.5%]
Today's Financial Times carries a rather gloomy piece by Martin Wolf. Mr. Wolf summarizes the ultra-bearish case as presented by economist Nouriel Roubini of RGE Monitor (*). Now, is there a bearish case to be made from the global liquidity perspective? You bet there is. Let me show you the results of backtesting a very simple model that combines elements of both macroeconomic and market liquidity. Whenever the sum of the rate of change of the Global Dollar Liquidity measure and the rate of change of the inverse of Moody's Baa spread is positive (negative), the "model" says be bullish (bearish).
- June 1997: Bullish. S&P500 at 885.14
- January 1998: Bearish. S&P500 at 980.28
- September 1999: Bullish. S&P500 at 1282.71
- October 2000: Bearish. S&P500 at 1429.71
- October 2001: Bullish. S&P500 at 1139.45
- January 2002: Bearish. S&P500 at 1130.20
- February 2002: Bullish. S&P500 at 1106.73
- May 2002: Bearish. S&P500 at 1067.14
- September 2002: Bullish. S&P500 at 815.28
- October 2002. Bearish. S&P500 at 885.77
- Januayr 2003. Bullish. S&P500 at 855.70
- August 2007. Bearish. S&P500 at 1473.99
(*) An earlier version of this post contained a harsh, and poorly documented, comment on Mr. Roubini as a forecaster. I am now withdrawing that comment: I want to focus on liquidity conditions — ad hominem remarks have no place in this blog. My apologies [Agustin].