Dollar Strength?

by Michael J. Howell27. January 2013 15:59
Liquidity is unquestionably flowing but its mix points to US dollar strength and not dollar weakness as in QE1 and QE2 in 2009-11. A too strong US dollar is the major risk to our prediction of cyclical recovery this year, but some dollar strength in the second half of each cycle is normal. The Euro, despite recent rallies, looks to be in medium-term decline (as it must) by around 3-5% pa. What looks different is the behaviour of the Yen. Our latest research reports show BoJ activity and they make the point that BoJ easing in the face of Yen weakness is very unusual. In short, the Yen looks set to decline by around 5-10% pa. Adding this up the US dollar trade-weighted index may be set to appreciate by 3-5% pa. Not good news for gold in 2013 and a feature likely to restrain buoyant commodity prices.

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Has Gold Lost Its Glister?

by Michael J. Howell24. January 2013 18:58
Short answer: yes, temporarily. Three things are against gold in 2013; two things are are in its favour. We expect a cyclical business upturn, starting in the US and EM and touching (just) Europe this year. Risk on will be back in favour, so reducing the need to shelter in gold. Second, yield curves are set to steepen, forcing up yields and reducing the attractions of gold. Third, the huge build-up of private savings (much in the dollar area) versus the (surprising) slowness to print money, is rarely a bullish message for gold. For subscribers to our liquidity data this means high private sector liquidity (PSL) and relatively low Central Bank liquidity (CBL). Set against this are two big positives: first, gold is the reserve asset of choice, or at least number two following the Euro Crisis, for many EM Central Banks. This year like last year will see more bullion buying by them. Second,this debt crisis is not over. More, much more, monetization is needed and this will ultimately push gold towards our long-term target of US$3500/oz.

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Yessss! Latest Liquidity Data Release

by Michael J. Howell11. January 2013 18:25
Latest End-2012 data is released to clients today. Fed liquidity is now fast accelerating, and the month saw a big jump in BoJ liquidity injections. Both confirm our predictions. China's PBoC continues to ease and collectively EM policy-makers delivered another sizeable boost. Only the ECB is going into reverse, and ths largely because their promised bond operations have yet to start. But the biggest news on the month is the jump in overall US credit provision by banks and shadow banks by nearly US$200 billion. US credit growth is definitively rising: the lending mechanism is again working. The Fed have won! Expect positive economic surprises to continue. Watch out bonds! For the record our December GLI (Global Liquidity Index) hit a healthy 64.0 (range 0-100) from 52.3 in November.

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Abe-cadabra: Japan Is Changing

by Michael J. Howell7. January 2013 17:17

Latest weekly BoJ net liquidity injections jump to Y50.4 trillion, or up from Y42 trillion at end-November. This looks more than just year-end window-dressing. Abe is working his magic!

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How to Understand 2013: Think 'M'

by Michael J. Howell2. January 2013 02:14

If like us you believe in the power and efficacy of Liquidity, then you should think about how liquidity moves? We maintain that it flows in a regular pattern that roughly traces out an M-shape over a decade long cycle. Liquidity leads by around year, but troughs are associated with banking crises and peaks with asset booms. The 'v' of the 'M' is typically shallow, giving approximately two asset booms per banking crisis. Banking crises occurred in 1966, 1974, 1982, 1990, 1998, 2007-08. The next is slated for sometime around 2016/17. Near enough to register, but too distant to worry about. Before then the next Liquidity peak is likely to be 2014, with 2013 a likely year (or should be) of rising liquidity. The last Liquidity peak was in 2010, and the recent 'v' lasted on cue from mid-2011 to late-2012, with liquidity drifting around its mid-levels. Thus, if we and our more prescient assistant history are correct, 2013 should see the monetary spigots open; yield curves steepen, paper currencies weaken, commodities jump and risk asset prices rise. This is our roadmap for 2013.

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The Big Event of 2013: 2012

by Michael J. Howell2. January 2013 01:51

We remain upbeat for this year, convinced the seeds for success were sown in 2012. Three 'liquidity' events proved critical: (1) Draghi at the ECB backstopped Eurozone risk with promises of extra cash; (2) Fed policy switched from attacking inflation to promoting employment. This message resonated among several other key Central Banks, so making it the most significant global policy change since Volcker took over the Fed in 1979, and (3) China's PBoC stepped up the pace of its liquidity injections from mid-year 2012. This halted domestic economic weakness; reversed the whopping outflow of foreign capital and promoted outperformance of EM equities from Q3. More of the same should be expected in 2013: paper currencies, notably the Yen, will remain fragile; commodity prices will pick-up; yield curves should steepen and rates start to rise, against the backdrop of still sluggish but better than expected economic activity. Above all EM equities will outperform: they are typically pro-cyclical and currently are out-of-favour with skeptical global investors, whose exposure remains a whopping two standard deviations below average.

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Bernanke Draghi Svensson Carney Iwata = CB Revolution

by Michael J. Howell21. December 2012 12:20

We celebrated just more than a year ago the appointment of Draghi at the ECB to continue  the good works of Bernanke at the Fed and Svensson at the Swedish Riksbank. Now Carney is slated to take-over the helm of the Bank of England, and rumours suggest that new Japanese PM Abe will turn to Iwata to lead the BoJ in 2013. These pro-employment CB changes are as significant as the selection of anti-inflation Volcker to head the 1978 Fed. The effect on the equity markets in 2012/13 may not be as dramatic as the impact Volcker had on the bond markets thirty years ago, but the positive effect will be felt.

This revolution attacks MV, i.e. money times velocity. Get M up via QE injections and raise V by creating inflation expectations via 'forward guidance', the Evans Rule (e.g. keeping rates low until unemployment drops below say 6,5%) or by weakening the US$. Taken together the latter are like having a nominal GDP target, or much as Carney as recently mooted for Britain.

All-in-all, given the well-known correlation between nominal GDP growth and nominal bond yields, this is poor news for global bonds. We expect yield curves to steepen. Normally this is bullish for other risk assets. The key to this puzzle may be Japan's JGB market. Investors must watch this bellwether in 2013 for confirmation that the new Central Bank Revolution is working its magic.

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2013: Big Questions For The Big Consensus

by Michael J. Howell19. December 2012 15:41

The first flush of November liquidity data allows us to reassess 2013 prospects. Hard evidence of extra cash inflows are thin. Latest data show the aggregate GLI (Global Liquidity Index) slipping back to 46.5 from a value of 57.0 in October, 2012 ('normal' range 0-100). The bulk of this setback came from lower Central Bank Liquidity in both the Eurozone and Japan in November. BoJ liquidity injections measured at an index value of 27.9 are proving remarkably weak in the face of persistent criticism of its policy and expectations that its hand will be 'forced' towards greater ease after the early December Election. Given that latest capital flow data highlight a sharp net outflow of money from Japan, this fact by itself would normally (and may be currently does) signal a domestic monetary tightening in response. Therefore, talk of a further flood of Yen from re-starting the printing presses could prove significant and highly disturbing for the forex and JGB markets in 2013. The long-threatened sell-off in JGBs could prove the key event for global bonds because if Japan can escape from deflation, so can the other economies.

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Global Liquidity Update

EM Another Bullish Sign?

by Michael J. Howell12. December 2012 20:29

EM markets have out-performed on cue since the announcement of QE3. We maintain our view that 2013 will prove another good year, underpinned by the latest Fed announcement and by the visible pick-up in our indicators of EM Central Bank Liquidity. EM Central Banks remain 'tight' on our measures, but these indexes are definitively turning higher. Chinese PBoC liquidity injections have risen moderately but consistently every month since May 2012, and our index of EM Central Bank Liquidity stands at its highest level for a year and more than double its low point value. This is consistent with the monetization of renewed capital inflows: a feature consistent with QE3. Bottom line is that EM equities are highly pro-cyclical. With the Workd economy near a turning point in 2013 and policy-makers focussed on getting more growth not less inflation, EM will outperform.

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by Michael J. Howell12. December 2012 18:27

Todays Fed Statement and the similar tone taken by a recent speech from in-coming BoE Governor Carney both show the shift of thinking away from inflation and towards employment as the general 2013-14 policy goal. The Fed as expected emphasised the 'US$85 billion' monthly figure of new injections of cash and cleared any doubts that it might be compromised by the slated end to 'Operation Twist'. It may be a moot point whether this constitutes an increase on the previous QE3 and so can rightly be labelled a QE4. Whichever, investors must view these collective statements by policy-makers as events in 2012 but as processes for 2013. The two key things to focus on are (1) starting point and (2) future delivery. The starting point in 2012 is from a relatively low liquidity point, ie on our measures the Fed is still quite tight. Thus we are fed up of seeing the now standard Central Bank balance sheet graph in the Press showing strong rises since 2008. We simple cannot compare the Fed the BoJ the BoE and he ECB by their absolute balance sheet sizes without taking into account their institutional structures. In short our measures confirm that CBs have much room to ease. Second, promises are one thing and delivery is another. The previous post touched on why the Fed has not delivered yet. Therefore, see this renewed QE3 as a general easing process through 2013. Moreover others will join. Next up the BoJ?

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