LIQUIDITY ANALYSIS. A TRULY HISTORIC AGREEMENT; THE TROUBLE WITH "HELICOPTER BEN"
[Latest Endogenous Liquidity Index: -65.5%; Latest Global Dollar Liquidity measure: +28.7%]

- A truly historic agreement! Yesterday's swap lines agreement between the Fed, Banco Central do Brasil, Banco de México, Bank of Korea and Singapore's Monetary Authority is a historic event. As any reader of Thomas Barnett's books on globalization would instantly recognize, these facilities confirm the inescapable reality of today's economic and financial connectivity. The message for commodity-exporting countries is clear: you can benefit from global trade flows, provided that you recognize the risks and that you play by the rules. Look at the list of CBs included in the "swap club": the Reserve Bank of Australia, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Japan, the Reserve Bank of New Zealand, the Norges Bank, the Sveriges Riksbank, and the Swiss National Bank. These are all independent central banks, which makes the inclusion of Banco de Mexico and Banco Central do Brasil all the more impressive. Henrique Meirelles, the Banco Central do Brasil chairman, waisted no time in putting forward the importance of the agreement: "O acordo é importante pela inclusão formal do Brasil com outras economias relevantes do globo". [Banco do Brasil: "Nota à imprensa"; Federal Reserve: "Press Release"]
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- The trouble with "Helicopter Ben". Remember Ben Bernanke's recent remarks at the Economic Club of New York? The thing that caught my attention was his response to a question on ... financial bubbles. In essence, Mr. Bernanke seemed to suggest that bubbles pop up whenever bank regulation fails. In other words: they have little to do with monetary policy itself. This was a clever answer, since we all know that it was the then Fed vice-chairman who in 2003 argued forcefully for a 1% fed funds rate. Now "Helicopter Ben" is at it again. I know, I know: in times of crisis, you just throw prudence to the wind. My point is, if you want to avoid a permanent spike in long-term rates, you need a monetary policy rule-set. And what is the FOMC's rule-set? I dunno. [Ben Bernanke: "Stabilizing the Financial Markets and the Economy", Federal Reserve]
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- Endogenous Liquidity daily watch. The Endogenous Liquidity Index improves modestly (+0.65%) on the heels of falling CDS spreads — especially Emerging Market spreads, as commodities rally and the dollar falls. Inflation breakevens are rebounding somewhat, and I suspect that they will move further up in coming days (they are still close to all-time lows, though). On a spot basis, the recent slight improvement in the 3-month TED spread is now history: we're back at 373 bps. The real worry, in my opinion, is the credit spreads situation. The 10-year Moody's Baa spread refuses to back down. That, my friends, is a sure sign of trouble in terms of corporate earnings. [Selected Interest Rates]
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