The Drain from Ukraine!

by Michael J. Howell13. May 2014 23:17
Russia's finances are looking grim. Our latest capital flow data shows that a net US$80 billion has left Russia over the last 12 months, with US$120 billion at annualised rate exiting last month alone. The net result is that our measures of Russian internal liquidity measures have halved in recent months to an index score of 28.4 ('normal' range 0-100) at end-April. The exiting cash has seemingly avoided the US dollar, possibly for fear of tougher US sanctions on Russian money, and instead piled into the Euro and sterling. This may make a Eurozone rate cut next month more certain, and it has catapulted capital inflows into the UK higher. On our CBC indexes, these now stand at 80, ('normal' range 0-100). For the brave, Russian assets must be a long-term buy. For the faint-hearted, stick with high-end London real estate!


Japanese Liquidity....Bad Signs!

by Michael J. Howell13. May 2014 17:19
According to our latest GLI index data, Japanese Liquidity has definitively weakened (64.8, or down from 91.1 last September, 'normal' range 0-100) over the past six months, led downwards by falling private sector cash flows (76.8 to 37.2 over same period). This may explain the weakness in Japanese equities. The implication is that either Abenomics is not working, or China’s economic slowdown is imparting a negative drag. This requires the BoJ to renew its easing and push the Yen lower.


May 2014 Release Global Liquidity Indexes GLIs

by Michael J. Howell13. May 2014 17:15
The Global Liquidity Cycle continues to slip lower according to our latest GLI estimates. End-April 2014 data show a move down to 45.8 from 52.8 ('normal' range 0-100). Global Liquidity is therefore below trend and decelerating. Risks are rising. Typically, market volatility tends to pick up within six months. The causes are widely-spread: Central Bank liquidity injections tightened again to 33.4 in April, with almost two-thirds of policy-makers by number now running 'tight' quantity policies. The most active of the key Central Banks withdrawing net stimulus last month were the US, Japan and China.


Global Liquidity Update

What Is Important?

by Michael J. Howell20. April 2014 14:04
Traditional economic and financial analysis in our view falls short. A recent IMF study showed that out of 88 recessions Worldwide since 2010, the economics consensus had only managed to predict 11 three months before the year in question, and still 3 out of the 11 were mistakes: a hit rate of less than 10%. So what is missing! We concentrate on different things. Here is a quick re-cap: # we believe in the quality theory of money, rather than the quantity theory. Here money circulates because it has value, it does not have value because it circulates. This means that changes in its value (the exchange rate) cause monetary velocity to speed up and slow down # consequently changes in monetary velocity and changes in cross-border capital flows (which far outstrip trade flows) combine to disrupt asset markets, and should ultimately but not always affect the real economy through duration adjustment via the changing tempo of capital spending # a distinct financial cycle exists which can differ from the more familiar economic cycle # liquidity is money in the form of means of purchase, whereas savings is money as means of settlement. Both are important but at different points on the monetary circuit. Imbalances between liquidity and savings are the main cause behind swings in the financial cycle # separating liquidity from savings reflects a flow of funds view of the World, where sources of funds precede uses of funds and where flows and stocks are tied together for consistency. In other words, debt flows cannot continue to build for ever # the 'price of money' is the exchange rate not the interest rate. The latter is NOT set by Central Banks but by the market based on the marginal productivity of capital. Central Banks are monopoly supplies of means of settlement money in crises # monitoring the flow of liquidity and the pattern of cross-border flows is critical to understand the asset economy and the real economy. Liquidity is a leading indicator and we put much effort into tracking its movements across 80 economies on a monthly basis. These GLI (Global Liquidity Indexes) have been regularly produced since the mid-1980s and are available by subscription.

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If Five Was Seven

by Michael J. Howell20. April 2014 12:23
Chinese Liquidity touched a lowlish index level of 31.1 in March according to our GLI data. Consistent with these persistently low macro-liquidity conditions, the Chinese State Statistics Bureau reported a weak Q1 GDP number. Or did they? The headlines trumpeted another 7.4% quarterly growth rate. All seemingly fine, except that this misleading number is a year-on-year increase and not a quarter-on-quarter one. Using quarterly, annualised data, Chinese GDP slowed markedly in Q1, 2014 to a 5.7% growth rate, or barely, above trend, and a sharp deceleration from the Q3, 2013 rate of 9.5% and the Q4 7.0% clip. Middling growth for the Middle Kingdom! Tight Liquidity plainly matters. If investors are realistic they must now cut at least 2-3% points from consensus Chinese GDP growth expectations for 2014.


Are EM Problems Really Structural?

by Michael J. Howell14. April 2014 13:09

In a just-released report we use Total Factor Productivity (TFP) data to highlight the worrying decline in the economic efficiency of many EM economies, notably China. The chart below highlights China and shows the essential problem. TFP measures 'true' value-added. Chinese TFP added 8% points to GDP growth in the early 2000s, but now TFP contributes nothing and is below US TFP. In short, China's true efficiency-adjusted growth rate is less than America's. But isn't this what financial markets have been trying to tell us?

Chinese and US Total Factor Productivity (% point contribution to GDP Growth)


Chinese Liquidity - End-March 2014 Data Released

by Michael J. Howell14. April 2014 12:48


GLI (Global Liquidity Indexes) -- End-March 2014 Data Released

by Michael J. Howell14. April 2014 12:27

End-March GLI (Global Liquidity Index) data reported a decline in our World headline index to 53.0 from 54.2 in February (‘normal’ range 0-100), and set against a 2013 peak of 63.5. More than 60% of the World's Central Banks are now 'tight' according to our policy indicators. Admittedly, Developed Market Liquidity proved a tad stronger, but the much-needed monetary inflation is pausing. Experience warns that this can be dangerous for risk assets and real economic activity. At a minimum, we expect market volatility to rise, bonds to find support and the US dollar to remain firm. Equity investors may face an air-pocket, but there is no question in our mind that policy-makers will have to engage further doses of QE at some time in the future. Put bluntly, Q2 2014 may prove tricky for equities and the catalyst could be sharp downgrades in consensus estimates of Chinese economic growth.


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US Fed Policy March FOMC...Hawkish?

by Michael J. Howell20. March 2014 07:18
March FOMC clearly worried the 5-year fixed income market. It should have hurt stocks more. The statement may not be outright hawkish, but it is the most hawkish in a relative sense for years. The Fed underscored its commitment to play up 'forward guidance' and run down QE with another $10 bn lopped off from April. This suggests to us that they are concerned about financial stability and are beginning to want markets to price in more risk: indeed Chairman Yellen essentially said so much in discussion of risk premia. But the bigger news may prove clarification on the Fed's reaction function, since it now seems clear that 2% inflation is no longer a target but a limit. This is a major change, if correct, since higher than 2% inflation will mean a faster move in rates. We have been warned! It confirms to us that the Fed are joining the PBoC in tightening policy. Not yet bearish, but plainly not bullish. See recent report: The Titans Tighten, March 2014.


Consequences of a Weak China

by Michael J. Howell18. March 2014 07:36
We are currently seeing EM dragged down by three largely external forces: (1) Western and particularly US capital has restructured post-Lehman and lowered its break-even costs to such an extent that production is re-on shoring; (2) China has put on her monetary brakes fairly 'hard'. This is disrupting regional capital flows and unhinging the Asian supply-chain. This will likely be a long and not a short-term monetary squeeze, and (3) in the 1960-90 period the Yen/US$ drove the tempo of the Asian business cycle, and may be doing so again given the Yen's recent collapse. In short, American restructuring, Chinese downsizing and Japanese competitiveness are doing the damage. No mention of US tapering, lack of EM reform and/or EM economic imbalances. They are simply not the issue. Since bad news in China will get worse in te near-term tred carefully! See latest EM research report.


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