Low Chinese Liquidity Drives the Next Crisis?

by Michael J. Howell30. January 2014 08:52
No surprise that latest PMI data shows Chinese economy weak. Our measure of Chinese liquidity flows which lead the economy have been depressed for part of 2012 and all of 2013. Without liquidity economies cannot grow and the China's PBoC has been deliberately squeezing for at least 18 months now. 4% rise in China's imports of crude oil in 2013 does not signal a rapidly growing economy. The domestic economy may not have a hard-landing but the rest of Asia and EM will. This is what the financial markets are currently trying to discount. Where does it end? (1) currency devaluations across EM; (2) renewed (imported) deflation in the West from later 2014, and (3) an EM debt/ banking crisis by 2016. As our research has suggested, buying US bonds in the later part of 2014 may make some sense. Liquidity matters...everywhere.

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Global Liquidity Data End-2013

by Michael J. Howell12. January 2014 14:17
According to our latest calculations, the Global Liquidity Index (GLI) ended 2013 at a value of 53.8. Normal range 0-100. This was lower than November (56.9) and below the 2013 June peak of 61.5. Admittedly, major cross-currents between the EM (Emerging Markets) and DM (Developed Markets) drag down the overall total but even examining the buoyant DM liquidity data they confirm what looks like an inflection point. EM liquidity remains weak. The equivalent DM GLI hit 67.2 at end-2013, or down from its 70.1 November reading. Looking inside this data adds further colour since Central Bank Liquidity is sub-par and drifting, whereas the recently far more dynamic Private Sector Liquidity index is high but now fading.


It's Not About Money, Nor Interest Rates.. Liquidity Matters Most

by Michael J. Howell3. January 2014 10:42
Like Mums and apple pie, more Liquidity is better than less. But surely interest rates and money matter more? Interest rates are important, but they are set by the market and not by Central Banks, despite all the pantomime and puff. What's more they derive from liquidity, viz the yield curve which as we show moves 3-6 months behind the liquidity cycle. Sure Central Banks can fix policy rates, like discount rate, but these seem to have little effect on market rates as 2008 proved. A more important price is the 'terms of a loan', but these reflect funding availability (ie liquidity) and typically move oppositely to policy interest rates, anyway. So what about money? For the non-economist, money is probably what we think of anyway as liquidity, ie. sources of funds, such as household savings, retained earnings and credit. For the economist, money supply is defined by bank deposits, or what has become a diminishing part of banks' funding sources, notwithstanding the fact that banks' themselves are also a smaller part of the lending universe. For example, our measures of US liquidity total some US$25 trillion, compared to roughly US$8 trillion for M2 money supply.' However, the damming evidence against money is 2013. US M2 money supply slowed to around a 5% annual growth rate. Admittedly, US credit growth was also tepid, but our measures of total sources of private sector funds leapt higher because US household rebuilt savings and US corporations enjoyed a big jump in their cash flows, viz the pick-up in M&A and persistent share buybacks. Adding these to the small rise in credit still allowed our index of US private sector liquidity to hit multi-year highs in 2013. Therefore, if we are correct this extra cash should underpin a stronger American economy in 2014. Flow of funds and liquidity should matter most.

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What Liquidity Events to Watch For In 2014

by Michael J. Howell3. January 2014 10:13
US monetary 'tapering' was the most talked about story in 2013, but in the event it proved the least important. The same may be true in 2014. The two big events last year were: (1) the success of QE ('quantitative easing') in driving Private Sector liquidity higher in the US, UK, Australia, Canada and Japan, and (2) the fallout across EM from Chinese PBoC 'tapering'. These made for a very 'normal' cycle in the DM and for an unusual one for EM, which despite the pick-up in the Global Economy suffered another sell-off. DM are being driven by their private sectors and not by policy-makers; ironically, it is EM that need policy support. There are four things to look out for in 2014: # positive effect of US shale oil on US flow of funds and US dollar # signs that 'normal' DM cycle continues with a capex revival and negative turning point in credit markets # evidence that Abenomics is continuing to work in Japan # persistence of 'tight' monetary policies in China We accept that the two most out-of-favour asset classes are gold and EM equities, but it still may be too early to jump back in. China needs to adjust away from its heavy bias towards capex and this will be a multi-year transition and runs similar risks to that experienced by the Soviet Economy in the 1980s when it too tried to change. China is capital abundant but energy short: not a good mix. Gold's fate is tied up with the US dollar and with the shale oil boom adding so much to US liquidity and the Fed more like to trim QE than not, the greenback could be in short-supply. This is the greatest risk in 2014. Already the rise in its 'sister' Sterling suggests a firmer dollar ahead. A stronger US dollar is not great news for EM, but it is better news for Europe and Japan. Japan will be a barometer in 2014 partly because Abenomics needs to work and partly because Japan is benefitting from a weak China. If Japan fails to get traction, it could warn that the World return on capital is again coming under pressure. This may compromise any capex recovery in DM; push down real interest rates and bash down risk appetite. All told, with the Global Liquidity cycle at or near a peak 2014 is likely to be a positive year, but it will definitely also be more volatile.

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Latest Global Liquidity & Capital Flow Data - November Update

by Michael J. Howell18. November 2013 12:03
Our latest Global Liquidity Index (GLI) hit 55.0 (range 0-100) at end-October2013. This above average score is being depressed by still very weak Emetging Market liquidity. Without this drag and excluding soft cross-border flows Developed Market liquidity hit an equivalent GLI of 76.2. The two key stories from our data are (1) DM liquidity still outpaces EM, and (2) Central Bank liquidity injections are being eclipsed by robust private sector flows. Indeed, as our latest research shows, this is the very reason why gold is sliding. We stand at a major inflection point in markets where market leadership is set to change, Volatility looks too low and cyclicals have underperformed too much over the past few years. Tapering will affect psychology more than it affects real economies.


Global Liquidity...boom?

by Michael J. Howell29. October 2013 21:12
Recent UK Media comment has picked up the buoyant Liquidity story. No question that Liquidity is strong and little doubt that strong liquidity acts through rising asset prices. However, our database covers all cah and credit flows to the private sector across 80 economies and not just deposit flows to banks. To be accurate our data shows there is a World of difference between Developed Market Liquidity which is close to previous highs (although not yet at new highs) and Emerging Market Liquidity which is near its lows. For completeness, we can add that Frontier Market is closer in strength to Developed Markets. Emerging Markets are the odd man out. The reason in our view remains the slowing Chinese economy which has clipped EM private sector cash flow. We should be worrying about recent Chinese PBoC tapering, and not only upcoming Fed tapering.


Latest GLI (Global Liquidity Index)

by Michael J. Howell14. October 2013 22:00
Global Liquidity is a measure of World capital flows and a barometer of upcoming risk. It remains elevated and still generally supportive of asset markets, but the high 60.0 index (0-100 'normal') reading of our GLI (Global Liquidity Index) at end-September 2013 hides two important facts. First, the developed markets (70.8) enjoy much stronger liquidity conditions than Emerging Markets (16.0). Second, private sector liquidity (78.1) remains well in excess of Central Bank liquidity (37.4). These observations are important because they are not only almost opposite to the consensus view, but they seem to be driving markets. Most investors believe that Emerging Markets enjoy structurally strong private sector or 'good' money flows while Developed economies are largely being supported by cyclical Central Bank QE or 'bad' money flows: the reality is that the opposite is true. ['Bad' here refers to the negative effect on currencies]. This 'Quality Theory of Money' lies at the heart of our regular capital flow analysis and it explains why the gold price and EM currencies are simultaneous fragile.

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New Frontiers

by Michael J. Howell26. September 2013 14:07

Frontier stock markets have outperformed strongly in 2013 compared to traditional EM. The reason is unequivocally because of better liquidity conditions. In a report published today, we examine the detail behind this. We conclude that Frontier Market liquidity is more closely correlated to buoyant US liquidity, whereas EM liquidity is more closely correlated with lacklustre Chinese liquidity. Thus, if US liquidity remains strong and Chinese liquidity fails to pick-up, Frontier markets will further outpace EM over coming months.

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September FOMC: Bernanke's Eastern Put

by Michael J. Howell19. September 2013 17:02

The Fed surprised markets by deciding not to start 'tapering' its QE programme at its September meeting. What does this mean? Markets read it bullishly, that the Fed will continue to buy bonds and pump in cash, probably because they sense policy-makers are concerned by recent weak-ish economic numbers. However, whatever the FOMC's internal doubts and debates, the Fed has been striving all year to divide 'forward guidance' on interest rates from 'tapering' of QE, arguing both publically and privately that the former is more important overall and anyway set more in line with economic prospects. Meanwhile, QE is thought to be more important for the finance sector, and some Fed policy-makers have been concerned over recent months by bubbles and a 'reach for yield'. This argues for tapering now. Therefore, the Fed's latest decision is puzzling because if they are concerned about economic growth they could have hinted at lower future 'forward guidance', while still making a token gesture towards some tapering. Something else may be up? This could be EM. July/ August saw a rout in several EM currencies and EM equity and bond markets because of the upcoming threat of tapering. The fragile state of EM may have convinced US policy-makers to hold fire on tapering for another couple of months. So, overall no real change in view. On balance a bit more bullish if the Fed is truly an implicit protector of EM, and on this read the Fed may not be as concerned about the US economy as some fear. Therefore, keep selling those bonds; buy back some dollars and bottom fish in EM. The Bernanke Put may have just shifted Eastwards!

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Latest GLI, Liquidity Data

by Michael J. Howell19. September 2013 16:54

This month we move to new 2010-weights for our GLI (Global Liquidity Indexes). EM get a larger share and Frontier Markets squeeze in with a 1.4% weighting.  Latest end-August 2013 data show our monthly GLI hit a reading of 59.2 ('normal' range 0-100). [Using the old weights, the GLI would be 70.8.] The overall index is one standard deviation above its rolling four-year average. The leaders in this cycle are unquestionably the US, Japan, Australia, Frontier Markets and the UK , while the Eurozone and EM are lagging. This looks to be a remarkably 'normal' cycle.







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