tag:blogger.com,1999:blog-74152496557796761932024-02-20T10:31:08.339+01:00The New Global Liquidity BlogAll you need to know about global liquidity: news, reviews, and ... numbers!Unknownnoreply@blogger.comBlogger256125tag:blogger.com,1999:blog-7415249655779676193.post-86695007962862000292011-02-19T11:53:00.004+01:002011-02-19T13:35:46.073+01:00<a href="http://www.benbernanke.net/images/Ben%20Bernanke/Ben_Bernanke.jpg"><img style="FLOAT: right; MARGIN: 0px 0px 10px 10px; WIDTH: 175px; CURSOR: hand; HEIGHT: 223px" alt="" src="http://www.benbernanke.net/images/Ben%20Bernanke/Ben_Bernanke.jpg" border="0" /></a><strong>BEN BERNANKE ON GLOBAL IMBALANCES</strong><br /><span style="font-family:times new roman;">[Global Dollar Liquidity: +11.9%; Endogenous Liquidity Index: +24.9%; <em>bullish</em>]</span><br /><br />Ben Bernanke on Global Imbalances (*). Overall, Mr. Bernanke aims to downplay the argument according to which QE is exacerbating competitiveness problems caused by hot money flows — particularly in emerging economies. Here's my takeaway:<br /><br />. <em>The cost of capital & property rights</em>. Note the link: "... capital flows from emerging markets to advanced economies will tend to be directed to <strong>the safest and most liquid assets</strong>, of which, these researchers argue, there <strong>is a relative</strong> <strong>shortage in emerging markets</strong>."<br /><br />. <em>Global flows & changes in behavior</em>. This is what Jacques Rueff had predicted all along: "The preference by so many investors for perceived safety created <strong>strong</strong> <strong>incentives</strong> for U.S. financial engineers to develop investment products that 'transformed' risky loans into highly rated securities. Remarkably, even though a large share of new U.S. mortgages during the housing boom were of weak credit quality, financial engineering resulted in the overwhelming share of private-label mortgage-related securities being rated AAA."<br /><br />. <em>The US's responsibility</em>. "These findings are not to be read as assigning responsibility for the breakdown in U.S. financial intermediation to factors outside the United States. Instead, in analogy to the Asian crisis, <strong>the primary cause of the breakdown was the poor performance of the financial system and financial regulation in the country receiving the capital inflows</strong>, not the inflows themselves". Note the reference to "risk-management deficiencies among financial institutions". No checks and balances, baby!<br /><br />. <em>Argentina & Brazil</em>. Although not explicitely named by Mr. Bernanke, these two countries provide a vivid illustration of the problems caused by sudden capital inflows: "The maintenance of undervalued currencies by some countries [read: Argentina] has contributed to a pattern of global spending that is unbalanced and unsustainable, as those countries that have allowed their exchange rates to be determined primarily by market forces [read: Brazil] have seen their competitiveness erode relative to countries that have intervened more aggressively in foreign exchange markets.<br /><br /><span style="font-family:times new roman;">(*) Ben S. Bernanke: "</span><a href="http://www.federalreserve.gov/newsevents/speech/bernanke20110218a.htm"><span style="font-family:times new roman;">Global Imbalances: Links to Economic and Financial Stability</span></a><span style="font-family:times new roman;">", At the Banque de France Financial Stability Review Launch Event, Paris, France, February 18, 2011.</span><br />_________Unknownnoreply@blogger.com219tag:blogger.com,1999:blog-7415249655779676193.post-55862451890319407462008-12-09T21:10:00.000+01:002008-12-09T21:12:45.343+01:00<strong>TRAVELLING SOUTH ... BE BACK ON FRIDAY ... THE STORY REMAINS THE SAME: VALUATION GENERALLY OK, BUT CREDIT SPREADS WILL CHECK RALLIES</strong>Unknownnoreply@blogger.com29tag:blogger.com,1999:blog-7415249655779676193.post-52248629796885023492008-12-04T18:42:00.000+01:002008-12-04T19:06:41.848+01:00<strong><em>LIQUIDITY NEWS</em>. RATE REDUCTIONS EVERYWHERE!</strong><br /><span style="font-family:times new roman;">[Latest <strong>Endogenous Liquidity Index</strong>: -64.9%; latest Global Dollar Liquidity measure: +40.3%]</span><br /><br />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 <em>destroy</em> 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 <em>global</em> liquidity trap?<br /><br />. <em>The RBNZ sets the tone</em>. 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". <span style="font-family:times new roman;">[</span><a href="http://www.rbnz.govt.nz/news/2008/3504509.html"><span style="font-family:times new roman;">RBNZ</span></a><span style="font-family:times new roman;">]</span><br /><br />. <em>The Riksbank: a leading indicator</em>. 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 ..." <span style="font-family:times new roman;">[</span><a href="http://www.riksbank.com/templates/Page.aspx?id=29849"><span style="font-family:times new roman;">Riksbank</span></a><span style="font-family:times new roman;">]</span><br /><span style="font-family:times new roman;"></span><br />. <em>The Old Lady moves again!</em> 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". <span style="font-family:times new roman;">[</span><a href="http://www.bankofengland.co.uk/publications/news/2008/121.htm"><span style="font-family:times new roman;">BoE</span></a><span style="font-family:times new roman;">]</span><br /><br />. <em>The laggard</em>. The ECB takes the main refinancing operations of the Eurosystem to 2.50%, own from 3.25% <span style="font-family:times new roman;">[</span><a href="http://www.ecb.int/press/pr/date/2008/html/pr081204.en.html"><span style="font-family:times new roman;">ECB</span></a><span style="font-family:times new roman;">]</span>Unknownnoreply@blogger.com2tag:blogger.com,1999:blog-7415249655779676193.post-58076472541181923812008-12-03T17:02:00.001+01:002008-12-03T17:28:22.091+01:00<strong>DAILY TWITTER-LIKE POSTS ON GLOBAL LIQUIDITY ...</strong><br /><span style="font-family:times new roman;">[Latest <strong>Endogenous Liquidity Index</strong>: -65.6%; latest <strong>Global Dollar Liquidity</strong> measure: +40.3%]</span><br /><br />. <em>A resilient market as credit spreads widen</em>. 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. <span style="font-family:times new roman;">[</span><a href="http://www.federalreserve.gov/releases/h15/update/"><span style="font-family:times new roman;">Selected Interest Rates</span></a><span style="font-family:times new roman;">]</span><br /><br />. <em>Hugh Hendry: bullish on government bonds</em>. Eclectica Asset Management's Hugh Hendry is always a highly entertaining guest over at CNBC Europe. Mr. Hendry looks at <em>inverted yield curves</em> 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! <span style="font-family:times new roman;">[Steve Johnson: "</span><a href="http://us.ft.com/ftgateway/superpage.ft?news_id=fto113020081727145247"><span style="font-family:times new roman;">Bold hedge fund star says stellar performance no longer enough</span></a><span style="font-family:times new roman;">", <em>Financial Times</em>]</span><br /><br />. <em>The UK & the euro</em>. 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 <em>very</em> large source of liquidity. Is the United Kingdom now thinking in similar terms? <span style="font-family:times new roman;">[BBC News: "</span><a href="http://news.bbc.co.uk/2/hi/uk_news/politics/7757830.stm"><span style="font-family:times new roman;">No 10 denies shift in euro policy</span></a><span style="font-family:times new roman;">"]</span>Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-7415249655779676193.post-87086412037679734022008-12-02T11:56:00.007+01:002008-12-03T17:33:05.638+01:00<strong>SOME TWITTER-LIKE POSTS ON GLOBAL LIQUIDITY ...</strong><br /><span style="font-family:times new roman;">[Latest <strong>Endogenous Liquidity Index</strong>: -66.3%; latest <strong>Global Dollar Liquidity</strong> measure: +40.3%]</span><br /><br />. <em>Credit spreads I</em>. The Moody's Baa spread trades at 601 bps. Difficult to feel too bullish about risky assets with such level of credit spreads.<span style="font-family:times new roman;"> [</span><a href="http://www.federalreserve.gov/releases/h15/update/"><span style="font-family:times new roman;">Selected Interest Rates</span></a><span style="font-family:times new roman;">]</span><br /><br />. <em>Credit spreads II</em>. Blackrock's Owen Murfin warns: the information-value of credit spreads is distorded (and undermined) by liquidity considerations, i.e. people being <em>forced</em> 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. <span style="font-family:times new roman;">[Sophia Grene: "</span><a href="http://media.ft.com/cms/c39dd1da-b93b-11dd-99dc-0000779fd18c.pdf"><span style="font-family:times new roman;">Bond spread not as scary as it first seems</span></a><span style="font-family:times new roman;">", <em>Financial Times</em>]</span><br /><br />. <em>Liquidity</em> <em>& checks and balances</em>. Countries with political checks and balances have the best credit systems. The same principle operates at a <em>micro</em>-economic level. Citigroup had no independent risk analysis system in place. What a mess! <span style="font-family:times new roman;">[Eric Dash & Julie Creswell: "</span><a href="http://www.nytimes.com/2008/11/23/business/23citi.html?pagewanted=1&_r=1&hp"><span style="font-family:times new roman;">Citigroup Saw No Red Flags Even as It Made Bolder Bets</span></a><span style="font-family:times new roman;">", <em>The New York Times</em>]</span><br /><br />. <em>Ben Bernanke on private credit markets</em>. "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). <span style="font-family:times new roman;">[Ben Bernanke: "</span><a href="http://www.federalreserve.gov/newsevents/speech/bernanke20081201a.htm"><span style="font-family:times new roman;">Federal Reserve Policies in the Financial Crisis</span></a><span style="font-family:times new roman;">"]</span><br /><br />. <em>RBA cuts rates</em>. The Reserve Bank of Australia cuts its target for the cash rate by 100 bps, down to 4.25%. Good news! <span style="font-family:times new roman;">[</span><a href="http://www.rba.gov.au/MediaReleases/2008/mr_08_27.html"><span style="font-family:times new roman;">RBA</span></a><span style="font-family:times new roman;">]</span>Unknownnoreply@blogger.com3tag:blogger.com,1999:blog-7415249655779676193.post-56795242316412617822008-11-26T17:16:00.001+01:002008-11-26T19:02:49.267+01:00<strong><em>LIQUIDITY NEWS</em>. THE LEGS OF THE RALLY</strong><br /><span style="font-family:times new roman;">[Latest <strong>Endogenous Liquidity Index</strong>: -60.6%; Latest <strong>Global Dollar Liquidity</strong> measure: +39.6%]</span><br /><span style="font-family:times new roman;"></span><br />Does the rally have legs? That's the key question, my friends. More than anything else, the <a href="http://liquidityblog.blogspot.com/2008/11/liquidity-news_20.html">rally</a> that started on Friday is about <em>valuation</em>. Forget all the brouhaha about Mr. Obama's appointees. On that score, stocks still look cheap. Having said that, the real legs of the rally are represented by ... credit spreads. Here, things look rather hellish, I must say. The legs of the rally are very weak. At 586 bps, Moody's Baa ten-year spreads trade at all-time highs — again. If, by early next week, spreads have not declined by at least 40bps, I'll be donning my bear costume. <span style="font-family:times new roman;">[Federal Reserve: </span><a href="http://www.federalreserve.gov/releases/h15/update/"><span style="font-family:times new roman;">Selected Interest Rates</span></a><span style="font-family:times new roman;">]</span><br />_______Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-7415249655779676193.post-26002279471012294522008-11-25T10:29:00.001+01:002008-11-25T11:38:53.440+01:00<strong><em>LIQUIDITY NEWS</em>. GLOBALIZING THE HKMA SOLUTION</strong><br /><span style="font-family:times new roman;">[Latest <strong>Endogenous Liquidity Index</strong>: -63.9%; Latest <strong>Global Dollar Liquidity</strong> measure: +40.1%]</span><br /><br />Interesting piece by John Muellbauer in today's <em>Financial Times</em> (*). Mr. Muellbauer's idea is to globalize the 1997-1998 unorthodox <a href="http://www.info.gov.hk/hkma/">HKMA</a> solution to the financial crisis. Back then, the Hong Kong Monetary Authority successfully intervened in asset markets, buying stocks from short-sellers in what turned out to be a very profitable trade. Now, says the author, the HKMA solution has to be <em>global</em> in scope: "Since no country is exempt, international co-ordination is needed and made easier because of the obvious common interest". Mr. Muellbauer is adamant about the nature of his plan: it is "reversible, self-financing and immediately applicable", as was the case in Hong Kong ten years back.<br /><br /><span style="font-family:times new roman;">International co-ordination will avoid the policy being seen as a sign of weakness or panic at the individual country level, with costs to currencies and government bond markets. The incentive structure for central banks to join such concerted action is less likely to create free rider problems than is the case for fiscal policy. Any central bank considering such action has an incentive not to delay since the potential profitability is likely to be lower for late participants, given that asset prices will generally be bid up in the process.</span><br /><br /><span style="font-family:times new roman;">(*) John Muellbauer: "</span><a href="http://ft.onet.pl/0,17560,the_world8217s_central_banks_must_buy_assets,artykul_ft.html"><span style="font-family:times new roman;">The world’s central banks must buy assets</span></a><span style="font-family:times new roman;">", <em>Financial Times</em>. </span>Unknownnoreply@blogger.com2tag:blogger.com,1999:blog-7415249655779676193.post-75666781709610595112008-11-24T11:02:00.006+01:002008-11-25T00:04:45.913+01:00<strong><em>LIQUIDITY NEWS</em>. ON RATES & BUBBLES: LOTS OF MATERIAL!<br /></strong><span style="font-family:times new roman;">[Latest <strong>Endogenous Liquidity Index</strong>: -65.9%; Latest <strong>Global Dollar Liquidity</strong> measure: +40.1%]<br /></span><br />I'm a big fan of the Market Price Approach to monetary policy, as outlined in 1996 by Manuel Johnson and Robert Keleher (*). Largely relying on the work of Swedish economist <a href="http://en.wikipedia.org/wiki/Knut_Wicksell">Knut Wicksell</a>, their recipe is deceptively simple: watch a trifecta of <em>market-based</em> indicators — the shape of yield curve, commodity prices and exchange rates. If the yield curve gets steeper and steeper, <em>and</em> commodity prices increase sharply, <em>and</em> the currency falls apart, then a central bank has an obvious inflation problem on its hands. [By the way, I'm collecting data to build a Market-Price-Approach Liquidity Index!]<br /><br />Right now, we're in a crisis — and the blame game is in full swing. Some people seem to think that the 1% fed funds rate of 2003 was the key culprit (in terms of the housing boom and the subsequent collapse). Although I tend to symphatize with that view, I've been around long enough to know that bubbles are incredibly complex phenomena. Along with monetary policy considerations, many additional factors intervene: innovation waves, structural economic shifts, and plain old human nature with its inseparable greed and fear elements. Enough said — here's some intellectual ammo on the subject of rates and bubbles:<br /><br />[1] <em>Fed vice-chairman Donald Kohn</em>. To his credit, Mr. Kohn does not dodge the bullet. "How might these monetary policy actions have fueled speculation?", he asks, rhetorically. His answer: maybe; but then again, it's more complex than that. "In a broader sense, perhaps the underlying cause of the current crisis was complacency. With the onset of the <em>Great Moderation</em> back in the mid-1980s, households and firms in the United States and elsewhere have enjoyed a long period of reduced output volatility and low and stable inflation. These calm conditions may have led many private agents to become less prudent and to underestimate the risks associated with their actions". <span style="font-family:times new roman;">[Donald L. Kohn: "</span><a href="http://www.federalreserve.gov/newsevents/speech/kohn20081119a.htm"><span style="font-family:times new roman;">Monetary Policy and Asset Prices Revisited</span></a><span style="font-family:times new roman;">", Federal Reserve Board]</span><br /><br />[2] <em>Jim Grant</em>. The <em>Financial Times'</em>' John Authers reviews <em>Mr. Market Miscalculates</em> by James Grant: "As early as 2004, he wrote about how the 1 per cent Fed Funds rate, with which the Greenspan Fed battled the perceived threat of deflation, had “transformed the borrowing patterns of the clientele of the northeast region of Washington Mutual”. WaMu has now passed into history as the biggest US bank failure on record". With such juicy passages in mind, Mr. Authers concludes that Grant's volume "may well be the most perceptive book on the current financial crisis yet published". <span style="font-family:times new roman;">[John Authers: "</span><a href="http://www.ft.com/cms/s/f0e7dcf0-b989-11dd-99dc-0000779fd18c,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2Ff0e7dcf0-b989-11dd-99dc-0000779fd18c.html&_i_referer=http%3A%2F%2Fwww.ft.com%2Fcomment"><span style="font-family:times new roman;">Profit from prophesies of doom</span></a><span style="font-family:times new roman;">", <em>Financial Times</em>] [</span><a href="http://www.grantspub.com/"><span style="font-family:times new roman;">Grant's Interest Rate Observer</span></a><span style="font-family:times new roman;">]</span><br /><br />[3] <em>Gerald P. O'Driscoll Jr</em>. This is by far the most <em>Wicksellian</em> piece of all: "With a commodity standard in place, the government would also have price signals that would alert it to the formation of a bubble. Why? Because the price of the commodity would be continuously traded in spot and futures markets. Excessive easing by the Fed would be signaled by rising prices for the commodity. In recent years, Fed officials have claimed that they cannot know when an asset bubble is developing. With a commodity standard in place, it would be clear to anyone watching spot markets whether a bubble is forming. What's more, if Fed officials ignored price signals, outflows of commodity reserves would force them to act against the bubble". Very interesting, although I doubt that such a mechanism would completely "avoid bubbles". <span style="font-family:times new roman;">[Gerald P. O'Driscoll Jr.: "</span><a href="http://www.cato.org/pub_display.php?pub_id=9790"><span style="font-family:times new roman;">To Prevent Bubbles, Restrain the Fed</span></a><span style="font-family:times new roman;">", <em>The Wall Street Journal</em>]<br /></span><br />[4] <em>Richard Duncan</em>. The author of <em>The Dollar Crisis: Causes, Consequences, Cures</em> is at it again: "Between unnaturally depressed interest rates and the buying spree by Fannie and Freddie, US property prices surged. The US housing bubble followed the ill-fated Nasdaq bubble. However, the inflation of the US housing market was one bubble too far. When it imploded, the global financial system was hurled into crisis, leaving the 21st century version of Anglo-American financial capitalism discredited". <span style="font-family:times new roman;">[Richard Duncan: "</span><a href="http://www.gata.org/node/6916"><span style="font-family:times new roman;">Bring back link between gold and dollar</span></a><span style="font-family:times new roman;">", <em>Financial</em> <em>Times</em>]<br /></span><br /><span style="font-family:times new roman;">(*) Manuel Johnson & Robert Keleher. <em>Monetary Policy: A Market Price Approach</em> (Westport, Connecticut: Quorum Books, 1996).</span>Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-7415249655779676193.post-40970781062396607162008-11-21T13:44:00.001+01:002008-11-23T08:47:58.101+01:00<strong><em>LIQUIDITY WATCH</em>. A WELCOME RETURN TO NORMALCY</strong><br />. <span style="font-family:times new roman;">Federal Reserve: "</span><a href="http://www.federalreserve.gov/releases/h41/Current/"><span style="font-family:times new roman;">Factors Affecting Reserve Balances</span></a><span style="font-family:times new roman;">", November 19</span><br /><span style="font-family:times new roman;"></span><br />- Fed's Treasuries holdings + loans: $1,473.4bn (-$11.5bn)<br />- Other central banks' Treasuries holdings: $1,609.9bn (+$1.9bn) (*)<br />- Other central banks' agency securities: $891.2 (-$8.7bn) (*)<br />- Global Dollar Liquidity Measure: $3,974.4bn (-$18.3bn)<br /><br /><span style="font-family:times new roman;">(*) Off-balance-sheet items</span><br /><a href="mailto:itemsagustin_mackinlay@yahoo.com"><span style="font-family:times new roman;">agustin_mackinlay@yahoo.com</span></a><br />_________________<br /><br />After five hectic weeks, a sense of normalcy is a welcome sign. The weekly Fed balance sheet has seen historic changes over the last couple of months. It has been amazing. Really. That's why I welcome the last installment, with its more normal variations. The Global Dollar Liquidity measure declines by $18.3bn, as the transitory character of some Fed operations kicks in, and as foreign CBs sell (quite understandably, one would imagine) some of their Fannie and Freddie positions. Having said that, the phenomenal year-on-year growth rates illustrate the sheer magnitude of central banks' commitment to ease policy at all costs. Thus, the Global Dollar Liquidity measure posts a +40.1% rate of increase, while my proxy for the monetary base increases by a mind-boggling ... 83.3%!<br /><br />On the monetary policy front, note the aggressive stance adopted by the Swiss National Bank, shaving a full 100 bps off its <a href="http://www.snb.ch/fr/mmr/reference/pre_20081120/source/pre_20081120.fr.pdf">target</a> for the libor rate, now at 0.5%-1.5%. The resulting weakness of the Swiss franc is another symptom (IMHO) of a coming <a href="http://liquidityblog.blogspot.com/2008/11/liquidity-news_20.html">rally</a> in risky assets.Unknownnoreply@blogger.com3tag:blogger.com,1999:blog-7415249655779676193.post-64649252082493135532008-11-20T17:36:00.000+01:002008-11-20T17:46:27.511+01:00<strong><em>LIQUIDITY NEWS</em>. A RALLY IS IN SIGHT!</strong><br /><span style="font-family:times new roman;">[Latest <strong>Endogenous Liquidity Index</strong>: -65.8%; Latest <strong>Global Dollar Liquidity</strong> measure: +39.6%]</span><br /><br />A rally is in sight. When valued against the Goldilocks/Stagflation index, the S&P500 trades now at the cheapest level ... ever! This is due to the collapse of ten-year inflation breakevens, courtesy of the phenomenal rally in Treasuries. The last time something like this happened, we duly got a 15% rally on the S&P500. Blood on Wall Street: a rally in sight.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7415249655779676193.post-28743401132592838412008-11-18T21:26:00.001+01:002008-11-18T22:13:12.180+01:00<strong><em>LIQUIDITY NEWS</em>. NICOLE ELLIOTT ON CNBC ... VERY BEARISH!</strong><br /><span style="font-family:times new roman;">[Latest <strong>Endogenous Liquidity Index</strong>: -64.2%; Latest <strong>Global Dollar Liquidity</strong> measure: +39.6%]</span><br /><br />Although I understand what a double bottom is, I am not a big fan of technical analysis. Having said that, there are some technicians I listen to. One is Nicole Elliott, of Mizuho Corporate Bank in London. Really impressive! Nicole is very bearish on risky assets right now. She's been consistently right on euro/yen and on the S&P500, and she sees yet more downside in the coming months. Today on CNBC Europe (I can' t find the video link), she said something that any <em>endogenous</em> liquidity watcher would immediately understand: "<em>There's no money out there; people are desperate to sell all peripheral assets</em>". <span style="font-family:times new roman;">[</span><a href="http://www.mizuho-cb.co.uk/TresInternet/TECHNICALS/Index.htm"><span style="font-family:times new roman;">Mizuho Technical Analysis</span></a><span style="font-family:times new roman;">]</span>Unknownnoreply@blogger.com2tag:blogger.com,1999:blog-7415249655779676193.post-68129372284626292002008-11-17T15:11:00.001+01:002008-11-17T15:33:36.486+01:00<strong><em>LIQUIDITY NEWS</em>. ENDOGENOUS LIQUIDITY AT A NEW ALL-TIME LOW</strong><br /><span style="font-family:times new roman;">[Latest <strong>Endogenous Liquidity Index</strong>: -64.6%; Latest <strong>Global Dollar Liquidity</strong> measure: +39.6%]</span><br /><br />- <em>A new all-time low</em>. 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 <em>macroeconomic</em> liquidity —as measured by the size of the Fed's balance sheet— has never been more <a href="http://liquidityblog.blogspot.com/2008/11/liquidity-watch_14.html">abundant</a>. The private sector's furious deleveraging process goes hand in hand with an equally furious re-leveraging effort by central banks.<br />___________<br /><br />- <em>Misleading readings on inflation expectations? Liquidity @ <strong>Financial Times</strong></em>. 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. <span style="font-family:times new roman;">[John Dizard: "</span><a href="http://us.ft.com/ftgateway/superpage.ft?news_id=fto111620081227252429"><span style="font-family:times new roman;">Weirdly, Tips yields point to deflation</span></a><span style="font-family:times new roman;">", <em>Financial Times</em>]</span><br />___________Unknownnoreply@blogger.com14tag:blogger.com,1999:blog-7415249655779676193.post-90017473674816448922008-11-14T10:21:00.004+01:002008-11-17T18:57:30.031+01:00<strong><em>LIQUIDITY WATCH</em>. AN IMPROVING SITUATION -- BUT STILL NO LONG-TERM BULLISH SIGNAL</strong><br />.<span style="font-family:times new roman;"> Federal Reserve: "</span><a href="http://www.federalreserve.gov/releases/h41/Current/"><span style="font-family:times new roman;">Factors Affecting Reserve Balances</span></a><span style="font-family:times new roman;">", November 12</span><br /><br />- Fed's Treasuries holdings + loans: $1,484.9bn (+$97.0bn)<br />- Other central banks' Treasuries holdings: $1,608.0bn (+$20.3bn) (*)<br />- Other central banks' agency securities: $899.9 (-$6.6bn) (*)<br />- Global Dollar Liquidity Measure: $3,992.9bn (+$110.6bn)<br /><br /><span style="font-family:times new roman;">(*) Off-balance-sheet items</span><br /><a href="mailto:itemsagustin_mackinlay@yahoo.com"><span style="font-family:times new roman;">agustin_mackinlay@yahoo.com</span></a><br />_________________<br /><br />My rather crude, but trusted and battle-tested long term buy/sell indicator for risky assets simply adds two rates of growth: that of the Global Dollar Liquidity measure, and that of the inverse of the Moody's Baa spread. It has been in <a href="http://liquidityblog.blogspot.com/2007/09/officially-bearish-but.html">bearish</a> territory since August 2007. Given the phenomenal increase in the size of the Fed's balance sheet, it's time to take a fresh look at the numbers. After all, the Global Dollar Liquidity measure is growing at an astonishing 39.6% annual rate. Things seem to be improving at the margin: the indicator is now at its less bearish point since November 2007. Still, we need as much as 124 bps of improvement in the Moody's Baa spread to get a new bullish signal.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7415249655779676193.post-83584123374214282152008-11-13T18:46:00.003+01:002008-11-14T08:35:12.194+01:00<strong><em>MONTEARY POLICY</em>. PRUDENCE, CANADIAN STYLE</strong><br /><span style="font-family:times new roman;">[Latest <strong>Endogenous Liquidity Index</strong>: -62.1%; Latest <strong>Global Dollar Liquidity</strong> measure: +37.7%]</span><br /><br />Today's <em>Financial Times</em> features an article by James Flaherty, Canada's finance minister, about the beauty of being ... <em>boring</em>. "Canadians by nature are prudent", says Mr. Flaherty. And he adds: "Our financial system has been characterized as unexciting. Canada's regulatory regime ensures that stability and efficiency are balanced". Very interesting indeed! I decided to put Canada's famed prudence to the test. More to the point, I checked the <a href="http://www.bank-banque-canada.ca/en/index.html">data</a> from Bank of Canada to get a sense of the shape of the yield curve, the ultimate <em>wicksellian</em> criterium of a prudent monetary policy. All in all, Mr. Flaherty's views seem to be backed by the evidence. The yield on the 10-year benchmark bond now trades at a <em>prudent</em> 1.65 <em>times</em> the target for the overnight rate (vs. a record and far-from-prudent 3.66 times in the U.S.)Unknownnoreply@blogger.com2tag:blogger.com,1999:blog-7415249655779676193.post-2524297461824873502008-11-12T17:26:00.003+01:002008-11-12T22:51:49.664+01:00<strong><em>LIQUIDITY NEWS</em>. KEVIN WARSH: PRIVATE & PUBLIC LIQUIDITY</strong><br /><span style="font-family:times new roman;">[Latest <strong>Endogenous Liquidity Index</strong>: -60.1%; Latest <strong>Global Dollar Liquidity</strong> measure: +37.7%]</span><br /><br />"Public liquidity is an imperfect substitute for private liquidity", <a href="http://www.federalreserve.gov/newsevents/speech/warsh20080414a.htm">says</a> Fed Governor Kevin Warsh. (When it comes to liquidity issues, Mr. Warsh is one of the Fed's most eloquent speakers -- see his well-crafted March 2007 speech on "<a href="http://www.federalreserve.gov/newsevents/speech/warsh20070305a.htm">Martket Liquidity: Definitions and Implications</a>"). But what does he really mean? If I understand him correctly, Mr. Warsh points to excessive central bank liquidity (in the past) as the key culprit of the current mess:<br /><br /><span style="font-family:times new roman;">More consequentially, we should recognize that Fed-supplied liquidity is a poor substitute for private-sector-supplied liquidity. When liquidity flows among private-sector participants, the players can more judiciously assess risk and reward, more adroitly learn from the recent turmoil to strengthen the resiliency of credit intermediation, and more ably allocate capital to its most productive uses in the real economy. Moreover, Fed-provided liquidity should not be mistaken for capital.</span><br /><br />I take Mr. Warsh's words as an endorsement of the usefulness of my very own ... <em>Endogenous Liquidity Index</em>!Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-7415249655779676193.post-48117157076561945032008-11-11T15:50:00.005+01:002008-11-13T18:22:07.897+01:00<strong><em>LIQUIDITY NEWS</em>. A 15% GDP CONTRACTION? </strong><br /><span style="font-family:times new roman;">[Latest <strong>Endogenous Liquidity Index</strong>: -60.7%; Latest <strong>Global Dollar Liquidity</strong> measure: +37.7%]</span><br /><br />- <em>A 15% GDP contraction? Liquidity @ Financial Times</em>. As a big fan of credit spreads (the best forward-looking indicator in terms of corporate earnings), I try to pay attention to what people write on the subject. It turns out that, according to Barclay's "model of implied economic forecasts from credit spreads", the market is discounting "as much as a 15 per cent decline in real gross domestic product for the US next year". Now, that's what you'd call a recession! Barclay's strategists are convinced that credit markets are <em>wrong</em>, and that equities at current prices might present "the buying opportunity of a generation". Perhaps. But watch the Moody's Baa ten-year spread (my own key benchmark): at 550 bps, it simply refuses to yield (pun intended). Not a good sign. <span style="font-family:times new roman;">[John Authers: "Time to buy?", </span><a href="http://www.ft.com/"><em><span style="font-family:times new roman;">Financial Times</span></em></a><span style="font-family:times new roman;">]</span><br />_________<br /><br />- <em>Hong-Kong, Argentina & the dollar peg</em>. Hong-Kong celebrates 25 years of US dollar peg. Meanwhile, Argentina broke away from its own peg in late 2001. Pegging your currency to the dollar is no panacea: you can't avoid episodes of both deflation (1999-2001) and inflation (2005-2007). Hong-Kong is willing to pay the price: "Where else should we go?", asks Donald Tsang, HK's chief executive. In 2008, Argentina faces the specter of stagflation. Its GDP is one of the most volatile in the world; there are no monetary policy rules, no checks and balances, <em>no nothing</em> — the perfect recipe for an ultra-high cost of capital. And while Argentina scrambles to protect is pseudo-currency, the HKMA <a href="http://www.info.gov.hk/hkma/eng/press/index.htm">lowers</a> its target for the base rate to 1.5%. <span style="font-family:times new roman;">[Tom Mitchell: "</span><a href="http://news.yahoo.com/s/ft/20081016/bs_ft/fto101620081223436683"><span style="font-family:times new roman;">Hong Kong celebrates 25 years of US dollar peg</span></a><span style="font-family:times new roman;">", <em>Financial Times</em>]</span><br />_________Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7415249655779676193.post-7187946399592123262008-11-10T16:43:00.001+01:002008-11-12T22:52:57.121+01:00<strong><em>LIQUIDITY NEWS</em>. THE TED SPREAD AT ONE-AND-A-HALF MONTH LOWS</strong><br /><span style="font-family:times new roman;">[Latest <strong>Endogenous Liquidity Index</strong>: -60.9%; Latest <strong>Global Dollar Liquidity</strong> measure: +37.7%]</span><br /><br />The spot TED spread, as measured with data from the Fed's daily "<a href="http://www.federalreserve.gov/releases/h15/update/">Selected Interest Rates</a>", trades at 268 bps (a level not seen since September 16, when Lehman Brothers failed). Now, if only the good <em>money market</em> news would translate into equally good <em>credit</em> <em>markets</em> news. This, alas, is still not the case: the Moody's Baa spread trades at 550 bps, close to its recent highs.Unknownnoreply@blogger.com10tag:blogger.com,1999:blog-7415249655779676193.post-9659843816862797362008-11-07T15:12:00.001+01:002008-11-12T22:53:41.663+01:00<strong><em>LIQUIDITY WATCH</em>. THE MADNESS CONTINUES</strong><br />. <span style="font-family:times new roman;">Federal Reserve: "</span><a href="http://www.federalreserve.gov/releases/h41/Current/"><span style="font-family:times new roman;">Factors Affecting Reserve Balances</span></a><span style="font-family:times new roman;">", November 5</span><br /><br />- Fed's Treasuries holdings + loans: $1,388.0bn (+$154.1bn)<br />- Other central banks' Treasuries holdings: $1,587.8bn (+$16.6bn) (*)<br />- Other central banks' agency securities: $906.5 (-$8.5bn) (*)<br />- Global Dollar Liquidity Measure: $3,882.3bn (+$162.2bn)<br /><br /><span style="font-family:times new roman;">(*) Off-balance-sheet items</span><br /><a href="mailto:agustin_mackinlay@yahoo.com"><span style="font-family:times new roman;">agustin_mackinlay@yahoo.com</span></a><br />_________________<br /><br />When a key central bank <a href="http://www.bankofengland.co.uk/publications/news/2008/076.htm">states</a> on its website that "the global banking system has experienced its most serious disruption for almost a century", you know that things look pretty scary. Presumably, in that context, you would do well to look at central banks' balance sheets with a grain of salt. You would assume, in other words, that some of the things they are doing are <em>temporary</em> in nature. Look at those incredible numbers from the last Fed weekly balance sheet. My proxy for the monetary base is increasing at a 75% annual rate in November. Let me say this again: SEVENTY-FIVE PERCENT! The Global Dollar Liquidity measure is growing at almost 38% (November 2008 vs. November 2007). Guys, it'd better be temporary. Trust me on this one.Unknownnoreply@blogger.com2tag:blogger.com,1999:blog-7415249655779676193.post-85378845234441922742008-11-06T15:05:00.002+01:002008-11-06T17:07:31.799+01:00<strong><em>LIQUIDITY NEWS</em>. A TALE OF TWO CENTRAL BANKS</strong><br /><span style="font-family:times new roman;">[Latest <strong>Endogenous Liquidity Index</strong>: -60.8%; Latest <strong>Global Dollar Liquidity</strong> measure: +29.6%]</span><br /><br />Liquidity-wise, the news today is dominated by the policy moves from both the Bank of England and the European Central Bank. The Old Lady moved first, and she decided to surprise financial markets with a 150 bp cut. The Bank rate stands now at 3.00% [<a href="http://www.bankofengland.co.uk/publications/news/2008/076.htm">communiqué</a>]:<br /><br /><span style="font-family:times new roman;">Since mid-September, the global banking system has experienced its most serious disruption for almost a century. While the measures taken on bank capital, funding and liquidity in several countries, including our own, have begun to ease the situation, the availability of credit to households and businesses is likely to remain restricted for some time. As a consequence, money and credit conditions have tightened sharply.</span><br /><br />The most serious disruption for almost a century! Now, that's seems to justify the audacity of the move! Now consider the ECB. Shortly after the BoE decision, many market participants thought that the Trichet Boys would go for a 75 bp, or even a 100 bp, cut. To no avail. The ECB opted for a tepid 50 bp move, taking the marginal lending facility to 3.75% [<a href="http://www.ecb.int/press/pr/date/2008/html/pr081106.en.html">communiqué</a>]. And here comes the interesting part. Guess what's happening to the euro/sterling cross? Actually, the pound is rallying. When FX markets react like that, it means that (nervous) investors are paying attention to asset markets <em>in general</em>, and not only to yields on short-term debt instruments.<br /><br /><span style="font-family:times new roman;">[PS. The Swiss National Bank also </span><a href="http://www.snb.ch/en/mmr/reference/pre_20081106/source/pre_20081106.en.pdf"><span style="font-family:times new roman;">announces</span></a><span style="font-family:times new roman;"> a "relaxation of monetary policy", lowering the three-month Libor target range by 50 basis points to 1.5%–2.5%].</span>Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-7415249655779676193.post-54500209854334292612008-11-05T10:08:00.002+01:002008-11-06T11:09:59.127+01:00<strong>LIQUIDITY NEWS ...<br /></strong><span style="font-family:times new roman;">[Latest <strong>Endogenous Liquidity Index</strong>: -58.5%; Latest <strong>Global Dollar Liquidity</strong> measure: +29.6%]</span><br /><span style="font-family:times new roman;"></span><br />- <em>Endogenous Liquidity Watch</em>. The Endogenous Liquidity Index improves once again, courtesy of both the falling VIX and collapsing CDS spreads. As expected, ten-year inflation breakevens have deteriorated somewhat following the recovery in commodity prices. As a result, the Goldilocks/Stagflation Index retreats a bit, which makes equities less attractive at current levels. There are some encouraging signs in terms of junk bond spreads: the "New Junk" spread trades at 877 bps, down from the high of 1013 bps reached on September 21. Still, I am a bit skeptical about further S&P500 rallies if Moody's Baa spreads fail to collaborate. [<a href="http://www.kdpyield.com/dayindex.cfm">KDP High Yield Daily Index</a>]<br />__________<br /><br />- <em>Denmark</em> <em>& the euro [Liquidity @ <strong>Financial Times</strong>]</em>. Can Scandinavian countries afford to go it alone? The banking crisis highlights the pitfalls of monetary sovereignty in the age of ... connectivity. The Danish central bank has been forced to sell FX reserves and to raise interest rates twice to shore up the krone: "The spread between Danish interest rates and the <a class="ticker" onclick="javascript:urchinTracker('/Gateway/BodyLink/Company');" href="http://us.ft.com/ftgateway/superpage.ft?criteria_name=text&criteria_value=%22ECB%22">ECB</a>'s was just 25 basis points in May; it is now at an all-time high of 175 basis points. This could widen further if the ECB cuts rates as expected by half a per cent on <a class="ticker" onclick="javascript:urchinTracker('/Gateway/BodyLink/Topic');" href="http://us.ft.com/ftgateway/superpage.ft?criteria_name=text&criteria_value=%22thursday">Thursday and the Danish</a> central bank does not follow. The interest rate rises threaten to push housing prices down further, hurt consumer spending and depress an already stagnating economy". <span style="font-family:times new roman;">[Robert Anderson: "</span><a href="http://us.ft.com/ftgateway/superpage.ft?news_id=fto110420081826480218&page=2"><span style="font-family:times new roman;">Danish PM seeks backing for euro referendum</span></a><span style="font-family:times new roman;">", <em>Financial Times</em>]</span><br />__________Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-7415249655779676193.post-12710261818554092332008-11-04T12:23:00.004+01:002008-11-05T07:34:50.701+01:00<strong><em>LIQUIDITY WATCH</em>. THE MOST SUCCESSFUL FED MOVE SO FAR?</strong><br /><span style="font-family:times new roman;">[Latest <strong>Endogenous Liquidity Index</strong>: -61.4%; Latest <strong>Global Dollar Liquidity</strong> measure: +29.6%]</span><br /><br />- <em>A very successful move by the Fed</em>. I am more convinced than ever that the recent swap <a href="http://www.federalreserve.gov/newsevents/press/monetary/20081029b.htm">agreement</a> 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 <em>The Warburgs: The Twentieth-Century Odyssey of a Remarkable Jewish Family</em> (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 <em>announcement</em> 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. <em>Bravo</em>!<br />_________<br /><br />- <em>Liquidity @ Financial Times</em>. Today's FT editorial <a href="http://www.ft.com/cms/s/cb770c3e-a9f3-11dd-958b-000077b07658,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2Fcb770c3e-a9f3-11dd-958b-000077b07658.html&_i_referer=http%3A%2F%2Fwww.ft.com%2Fhome%2Feurope">comment</a> 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 <em>demand</em> for bank reserves, then CBs may find themseleves forced to <em>destroy</em> liquidity just to prevent their target rates from collapsing. This is what happened in Japan in the 1990s.<br />_________<br /><br />- <em>Another stunning move Down Under</em>. The Reserve Bank of Australia delivers another bold rate cut: -75 bps to a 5.25% target rate. From the <a href="http://www.rba.gov.au/MediaReleases/2008/mr_08_25.html">communiqué</a>: "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".Unknownnoreply@blogger.com4tag:blogger.com,1999:blog-7415249655779676193.post-84170972131209794172008-11-03T17:33:00.000+01:002008-11-03T17:58:58.741+01:00<strong><em>LIQUIDITY ANALYSIS</em>. WHEN IT COMES TO LIQUIDITY, SIZE MATTERS</strong><br /><span style="font-family:times new roman;">[Latest <strong>Endogenous Liquidity Index</strong>: -65.3%; Latest <strong>Global Dollar Liquidity</strong> measure: +29.6%]</span><br /><span style="font-family:times new roman;"></span><br />As the Belgian bank giant Fortis collapses, citizens of that country appreciate the <em>bonheur</em> of belonging to the eurozone. Had it not been for the euro, Belgium would have devalued and sharply increased interest rates — just as Iceland was forced to do. The banking and financial crisis is quickly changing perceptions. Across Europe, there is a bit of a scramble to join the euro. Politicians from Scandinavia to Eastern Europe, fearful of the abyss, are re-evaluating the wisdom of going it alone (Denmark, Sweden, Norway) or postponing structural reform (Hungary, Poland). Brazil and Mexico have secured a swap line from the Federal Reserve Bank. When it comes to liquidity conditions, size seems to matter after all (*).<br /><br /><span style="font-family:times new roman;">(*) See the very good piece by Wolgang Münchau: "</span><a href="http://ft.onet.pl/0,16602,now_they_see_the_benefits_of_the_eurozone,artykul_ft.html"><span style="font-family:times new roman;">Now they see the benefits of the eurozone</span></a><span style="font-family:times new roman;">", <em>Financial Times</em>.</span>Unknownnoreply@blogger.com2tag:blogger.com,1999:blog-7415249655779676193.post-35969195348808438392008-10-31T14:41:00.005+01:002008-11-02T13:04:15.325+01:00<strong><em>LIQUIDITY WATCH</em>. WHAT A MESS!</strong><br />. <span style="font-family:times new roman;">Federal Reserve: "</span><a href="http://www.federalreserve.gov/releases/h41/Current/"><span style="font-family:times new roman;">Factors Affecting Reserve Balances</span></a><span style="font-family:times new roman;">", October 30</span><br /><br />- Fed's Treasuries holdings + loans: $1,233.9bn (+$50.5bn)<br />- Other central banks' Treasuries holdings: $1,571.2bn (+$15.9bn) (*)<br />- Other central banks' agency securities: $915.0 (-$8.4bn) (*)<br />- Global Dollar Liquidity Measure: $3,290.4bn (+$58.0bn)<br /><br /><span style="font-family:times new roman;">(*) Off-balance-sheet items</span><br /><a href="mailto:agustin_mackinlay@yahoo.com"><span style="font-family:times new roman;">agustin_mackinlay@yahoo.com</span></a><br />_________________<br /><br />The weekly Fed balance sheet is a complete mess. (Other words that come to my mind: chaos, confusion, anarchy). New items are being added every week. And we're talking <em>hundreds of billions of dollars</em>. Literally. My new Global Dollar Liquidity measure, which (hopefully) reflects the impact of all recent liquidity programs, now reaches almost $3.3 <em>trillion</em>. The numbers are trully mind-boggling. Monthly average figures (not displayed here) show a 46.5% increase in my proxy for the monetary base. Think about it: prior to the Lehman Brothers collapse, we were dealing with a 2.6% <em>contraction</em>. This is by far the greatest balance sheet expansion in the history of the Federal Reserve Bank. The Global Dollar Liquidity is growing at the phenomenal rate of 29.6% per annum. Totally unheard of!<br /><br />Ladies and gentlemen, it's not that complicated after all: the massive delevarging efforts by the private sector are being matched by an equally massive releveraging process from G7 central banks. Keynesian economics, anyone?Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7415249655779676193.post-57750267988195360482008-10-30T10:53:00.005+01:002008-10-30T14:09:58.383+01:00<strong><em>LIQUIDITY ANALYSIS</em>. A TRULY HISTORIC AGREEMENT; THE TROUBLE WITH "HELICOPTER BEN"</strong><br /><span style="font-family:times new roman;">[Latest <strong>Endogenous Liquidity Index</strong>: -65.5%; Latest <strong>Global Dollar Liquidity</strong> measure: +28.7%]</span><br /><br />- <em>A truly historic agreement!</em> 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 <a href="http://www.thomaspmbarnett.com/weblog/">books</a> 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 <a href="http://www.gazetamercantil.com.br/GZM_News.aspx?Parms=2153740,1,20,2">putting forward</a> the importance of the agreement: "O acordo é importante pela inclusão formal do Brasil com outras economias relevantes do globo". <span style="font-family:times new roman;">[Banco do Brasil: "</span><a href="http://www.bcb.gov.br/noticias/Noticias.asp?noticia=1&idioma=P&cod=1905"><span style="font-family:times new roman;">Nota à imprensa</span></a><span style="font-family:times new roman;">"; Federal Reserve: "</span><a href="http://www.federalreserve.gov/newsevents/press/monetary/20081029b.htm"><span style="font-family:times new roman;">Press Release</span></a><span style="font-family:times new roman;">"]<br /></span>__________<br /><br />- <em>The trouble with "Helicopter Ben".</em> 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 <em>long-term</em> rates, you need a monetary policy rule-set. And what is the FOMC's rule-set? <a href="http://www.urbandictionary.com/define.php?term=i%20dunno">I dunno</a>. <span style="font-family:times new roman;">[Ben Bernanke: "</span><a href="http://www.federalreserve.gov/newsevents/speech/bernanke20081015a.htm"><span style="font-family:times new roman;">Stabilizing the Financial Markets and the Economy</span></a><span style="font-family:times new roman;">", Federal Reserve]</span><br />_________<br /><br />- <em>Endogenous Liquidity daily watch</em>. 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. <span style="font-family:times new roman;">[</span><a href="http://www.federalreserve.gov/releases/h15/update/"><span style="font-family:times new roman;">Selected Interest Rates</span></a><span style="font-family:times new roman;">]</span><br />_________Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7415249655779676193.post-44165922835479819012008-10-29T15:16:00.001+01:002008-10-29T22:44:24.463+01:00<strong>LIQUIDITY NEWS ...</strong><br /><span style="font-family:times new roman;">[Latest <strong>Endogenous Liquidity Index</strong>: -65.8%; Latest <strong>Global Dollar Liquidity</strong> measure: +28.7%]</span><br /><br />- <em>The Fed cuts rates</em>. The FOMC lowers the fed funds target to 1.00% from 1.50%; in a related action, the Board of Governors unanimously approves a 50-basis-point decrease in the discount rate to 1.25%. <span style="font-family:times new roman;">[</span><a href="http://www.federalreserve.gov/newsevents/press/monetary/20081029a.htm"><span style="font-family:times new roman;">Communiqué</span></a><span style="font-family:times new roman;">]</span><br /><br />- <em>Two new swap lines</em>. The Fed <a href="http://www.federalreserve.gov/newsevents/press/monetary/20081029b.htm">announces</a> the establishment of temporary reciprocal currency arrangements (a.k.a swap lines) with the Banco Central do Brasil, the Banco de Mexico, the Bank of Korea, and the Monetary Authority of Singapore. (A similar <a href="http://www.federalreserve.gov/newsevents/press/monetary/20081028a.htm">announcement</a> was made yesterday with respect to the Reserve Bank of New Zealand.)<br /><br />- <em>Norway's central bank lowers key rate from 5.25% to 4.75%</em>. From the <a href="http://www.norges-bank.no/templates/article____72535.aspx">communiqué</a>: "There is now unusually high uncertainty surrounding economic developments ahead. An overall assessment of the outlook and the balance of risks suggests that it is now appropriate to reduce the key policy rate by 0.50 percentage point. Weight is given to moving forward the reduction in the key policy rate so that lending rates for households and businesses can gradually be reduced".<br /><br />- <em>The People's Bank of China cuts one-year lending rate from 6.93% to 6.66%</em>. From <a href="http://www.bloomberg.com/apps/news?pid=20601080&sid=aTS7_VmUNvxI&refer=asia">Bloomberg</a>: "This cut was driven by the slowdown in the third quarter and the likelihood that the U.S. and other central banks will cut rates,'' said <a href="http://search.bloomberg.com/search?q=Xing+Ziqiang&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1" t_above="true" t_static="true" t_fontcolor="#000000" t_fontface="Verdana,sans-serif" t_bgcolor="#ddedd9" t_width="110" t_delay="50">Xing Ziqiang</a>, an economist at China International Capital Corp. in Beijing". Coordinated rate cuts, anyone?Unknownnoreply@blogger.com0