Tuesday, December 9, 2008

TRAVELLING SOUTH ... BE BACK ON FRIDAY ... THE STORY REMAINS THE SAME: VALUATION GENERALLY OK, BUT CREDIT SPREADS WILL CHECK RALLIES

Thursday, December 4, 2008

LIQUIDITY NEWS. RATE REDUCTIONS EVERYWHERE!
[Latest Endogenous Liquidity Index: -64.9%; latest Global Dollar Liquidity measure: +40.3%]

As expected, central banks deliver on the interest rate front. But will it work? Not if demand for bank reserves continues to weaken. When demand for bank reserve collapses, central banks may indeed destroy liquidity, even as they lower their target for the short rate. This happened in Japan in the early 1990s. It's called the liquidity trap. Look at the comments on inflation: are we in the midst of a global liquidity trap?

. The RBNZ sets the tone. The Reserve Bank of New Zealand reduces the Official Cash Rate (OCR) from 6.5 percent to 5.0 percent. Note the comment: "Inflation is abating here and overseas". [RBNZ]

. The Riksbank: a leading indicator. The Swedish CB slashes rate in a dramatic move. The Riksbank often leads other CBs in terms of monetary policy. "The Executive Board of the Riksbank has decided to cut the repo rate by 1.75 percentage points to 2 per cent". Again: "A lower interest rate path ..." [Riksbank]

. The Old Lady moves again! The Bank of England reduces the Bank rate by a full 100 bps to 2.00%! According to the Committee: "... measures of inflation expectations fell back sharply". [BoE]

. The laggard. The ECB takes the main refinancing operations of the Eurosystem to 2.50%, own from 3.25% [ECB]

Wednesday, December 3, 2008

DAILY TWITTER-LIKE POSTS ON GLOBAL LIQUIDITY ...
[Latest Endogenous Liquidity Index: -65.6%; latest Global Dollar Liquidity measure: +40.3%]

. A resilient market as credit spreads widen. The market is showing some resilience here in the face of surging credit spreads. At 612 bps, the Moody's Baa spread trades at record highs — a sure sign that corporate earnings are collapsing as we speak. [Selected Interest Rates]

. Hugh Hendry: bullish on government bonds. Eclectica Asset Management's Hugh Hendry is always a highly entertaining guest over at CNBC Europe. Mr. Hendry looks at inverted yield curves a sure sign of danger in terms of riksy assets. He now thinks that US equities "could remain in the doldrums" for another 15 ... years! [Steve Johnson: "Bold hedge fund star says stellar performance no longer enough", Financial Times]

. The UK & the euro. Denmark's prime minister and central bank chief both recently stated that the key lesson from the financial crisis was that the country had to join the euro. The ECB, after all, represents a very large source of liquidity. Is the United Kingdom now thinking in similar terms? [BBC News: "No 10 denies shift in euro policy"]

Tuesday, December 2, 2008

SOME TWITTER-LIKE POSTS ON GLOBAL LIQUIDITY ...
[Latest Endogenous Liquidity Index: -66.3%; latest Global Dollar Liquidity measure: +40.3%]

. Credit spreads I. The Moody's Baa spread trades at 601 bps. Difficult to feel too bullish about risky assets with such level of credit spreads. [Selected Interest Rates]

. Credit spreads II. Blackrock's Owen Murfin warns: the information-value of credit spreads is distorded (and undermined) by liquidity considerations, i.e. people being forced to sell corporates. I know that already: market-based indicators are not perfect. But they are doing a heck of a job all the same. [Sophia Grene: "Bond spread not as scary as it first seems", Financial Times]

. Liquidity & checks and balances. Countries with political checks and balances have the best credit systems. The same principle operates at a micro-economic level. Citigroup had no independent risk analysis system in place. What a mess! [Eric Dash & Julie Creswell: "Citigroup Saw No Red Flags Even as It Made Bolder Bets", The New York Times]

. Ben Bernanke on private credit markets. "The Federal Reserve's liquidity programs ... have not yet returned private credit markets to normal functioning". Now that's an understatement! (The Endogenous Liquidity Index is now 66.3% below last year's level). [Ben Bernanke: "Federal Reserve Policies in the Financial Crisis"]

. RBA cuts rates. The Reserve Bank of Australia cuts its target for the cash rate by 100 bps, down to 4.25%. Good news! [RBA]