Monday, November 17, 2008

[Latest Endogenous Liquidity Index: -64.6%; Latest Global Dollar Liquidity measure: +39.6%]

- A new all-time low. My Endogenous Liquidity Index, which comprises CDS spreads, cash bond spreads, volatility indicators and others closed on Friday at a new all-time low. The index is now 64.6% below its November 2007 levels. This situation is remarkable, especially when you realize that macroeconomic liquidity —as measured by the size of the Fed's balance sheet— has never been more abundant. The private sector's furious deleveraging process goes hand in hand with an equally furious re-leveraging effort by central banks.

- Misleading readings on inflation expectations? Liquidity @ Financial Times. Mike Pond, an inflation-linked bond strategist at Barclays Capital, says: "A lot of people call the move in nominal Treasuries [without the inflation indexing] a flight to quality. But it is really a flight to liquidity. Tips have the same credit as nominals, but the nominals are indeed much more liquid". Very interesting! In other words: take the message from inflation breakevens with a grain of salt. Liquidity considerations, short squeezes, supply disruptions and even hurricanes can affect the information value of any market-based indicator. You just have to know it. [John Dizard: "Weirdly, Tips yields point to deflation", Financial Times]


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