LIQUIDITY WATCH. THE MOST SUCCESSFUL FED MOVE SO FAR?
[Latest Endogenous Liquidity Index: -61.4%; Latest Global Dollar Liquidity measure: +29.6%]

- A very successful move by the Fed. I am more convinced than ever that the recent swap agreement between the Fed and the central banks of Brazil, Korea, Mexico and Singapore was nothing short of a brilliant stroke. Why do I say that? Because the Emerging Markets CDS has collapsed from 1056 bps on October 23 to 658 bps yesterday. I am reminded of an episode I read about a while back in Ron Chernow's The Warburgs: The Twentieth-Century Odyssey of a Remarkable Jewish Family (New York: Random House, 1993). In the Vienna of the late 1850s, a devastating panic in the banking sector is brought to an end by news that a train loaded with silver ingots (arranged by the Warburg family) is on its way from Germany. In the event, not an ounce of the silver was sold. The mere announcement of the incoming train was enough to calm the markets down. This is happening right now in some of the most important emerging markets. The swap lines have remained untouched, but the panic has receded. As a result, the Endogenous Liquidity Index continues to improve. Bravo!
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- Liquidity @ Financial Times. Today's FT editorial comment stresses the need for fiscal stimulus as a crucial element of any strategy designed to get the world economy out of the "liquidity trap". There is something to be said in favor of this position. If a broad and prolonged recession puts permanent downward pressure on the demand for bank reserves, then CBs may find themseleves forced to destroy liquidity just to prevent their target rates from collapsing. This is what happened in Japan in the 1990s.
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- Another stunning move Down Under. The Reserve Bank of Australia delivers another bold rate cut: -75 bps to a 5.25% target rate. From the communiqué: "International economic data have continued to point to significant weakness in the major industrial economies, and there have been further signs that China and other parts of the developing world are slowing as well. These conditions have contributed to further falls in world commodity prices".