Tapering ... Bah!

by Michael J. Howell15. August 2013 09:34
'the money here is awful ...and such small flows...' is a Groucho Marx-like reflection on the growing debate over Fed tapering. Fact #1 is that QE3 is no QE1 and never was. The $85 billion monthly Fed injections could easily be trimmed to $75 bn at the September FOMC, but these flows are anyway being swamped by buoyant private sector liquidity inflows. These private flows, not the Fed, explain the firm US dollar; the rebounding US economy and rising bond yields. In short, policy-makers have been fooling the markets this year with their power. Fact #2 most of the Fed cash is effectively going to support the still fragile wholesale money markets. Given the vast increase in OTC bond issuance/ trading since 2008, these wholesale markets are probably still vital in providing funding for market makers. Fact #3 the Fed is internally worried by growing speculative activity and needs to show its hand. We know that the key decision makers anyway prefer 'forward guidance' to 'QE', so the latter is an easy sacrifice. Bottom line? Expect a September move to reduce QE. This will not derail the economic recovery, but it is likely to help the US dollar climb higher, and most importantly it will be yet another factor leading to greater market volatility over the next 12 months. Tapering matters, but not that much.

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Latest Global Liquidity Data - August Update

by Michael J. Howell14. August 2013 09:40
The latest (end-July) Global Liquidity Index (GLI) hit 73.8% against a 'normal' 0-100 range. This is equivalent to US$145 billion pouring into World financial markets. The distribution of liquidity remains very uneven. The leading markets were again the US, Britain and Japan, with liquidity in the Eurozone and Emerging Markets weak. The data show strongly divergent trends in private sector liquidity, and warn of heightened forex market volatility.


Global Liquidity Update

Latest GLI - June Liquidity Update

by Michael J. Howell18. July 2013 23:59
Latest end-June 2013 data show our monthly Global Liquidity Index (GLI) hit a reading of 75.4 ('normal' range 0-100). Stripping out the two weak liquidity regions, namely EM and Eurozone, the overall index would exceed 85, or more than two standard deviations above its rolling four-year average.

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Mid-Year Review: The Three Big Events So Far in 2013

by Michael J. Howell8. July 2013 22:24
Believe or not, the big events of 2013 do not nclude either the influx or proposed ending of Fed QE3? We figure that three others are more critical. Together they explain the high current level and uneven distribution of global liquidity. See our research for more information: (1) the jump in US private sector cash flow generation, which is dollar and economy bullish; (2) huge Japan QE, which smashed the Yen, hurt EM economies, but will cause a Japanese economic turnaround, and (3) the decision by the PBoC in China to remain tight, which will cap Chinese growth and limit further large-scale capex.


Watch Bonds

by Michael J. Howell21. June 2013 08:19
Bond markets nearly always give more sober assessments than equities. The movements in global fixed income markets in the past two months have it right again. QE or simply more liquidity drive up the risk premia on long-dated bonds (the low risk asset) and drive down the risk premia elsewhere. This is Liquidity Theory 101. If policy-makers anchor the short-end (they do) this beomes a bear steepening. The Central Banks pumping in most liquidity, the Japanese and the US, see the greatest yield curve steepening and those pumping least,the ECB, suffer the least (Bunds). On top, think about real interest rates. These are rising in anticipation of better economic growth in the second half 2013 and, if we are correct, stronger capex. The rise is connected to the end of the Great China Cost Shock we have written much about. This will push up marginal returns on capital and cause real rates to rise. 4-5% bond yields are again on the horizon. This is bullish for everyone else!

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Risk Assets ...Time to Exit?

by Michael J. Howell21. June 2013 08:06
The mid-June FOMC spooked markets with Bernanke's exit talk. Actually, we learned nothing new here and in fact if anything the long-tail exit should be reassuring. In our view, this liquidity cycle should last until 2015, and we still rate 2016/17 the mst likely time for the next banking crisis. So what now? The big stories for 2013 are not about the Fed, but three other things (1) strong growth in US private sector cash flows; (2) Bank of Japan QE and (3) lack of any QE in Eurozone and China. In short, liquidity may be high globally but it is skewed first towards the US and Japan and second skewed towards private sectors. Central banks overall including the Fed are not as easy as many assume. Strong private sector liquidity is a sign to us that economies will pick up strongly in the second half 2013. This tension is worrying bond markets. Money now has two directions to go it: real activity and financial assets. This must heighten volatility. The next 18 months should still see rising risk asset markets, but it will be a much bumpier ride.

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Emerging Markets??

by Michael J. Howell21. June 2013 07:48
Emerging Marets are in the eye of the storm. This not a surprise but it is important to understand why, not least because investors currently have relatively low exposure. Our long standing mantra is that every EM crisis is first-and-foremost a currency crisis. EM have suffered this year from a lack of capital inflow. Tensions have been worsened by a tight Chinese monetary stance that shows few signs of abating, and the collapse in the Yen. Traditionally (pre-mid 1990s) the Yen was the key driven of the Asian business cycle. This troubling backdrop has forced EM policy-makers to tighten their own policies to protect currencies, but in the process they are causing significant domestic economic slowdowns, that in turn add further downward pressure on currencies. Viz Turkey and Brazil. Liquidity levels on our indexes are very low, circa 35 index level (0-100 'normal' range). They need to jump before we recommend returning. This probable influx of Central Bank cash will further weaken EM currencies and trouble EM bonds, and the sell-off in EM credits may spread out into Eurozone credit markets which also look highly exposed. The second half year 2013 looks a better time to re-enter EM assuming currencies have adjusted, since by then there should be strong signs of cyclical rebound in the US and Japan.

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Global Liquidity Index (GLI) Latest

by Michael J. Howell17. June 2013 15:10

Latest Global Liquidity Index (GLI) data from CrossBorder Capital show the headline GLI hitting 73.8 (normal range 0-100). The distribution od World liquidity is dangerously skewed. Moreover, levels of liquidity above 70 on our index are associated with average VIX levels above 28.1%. For more information please contact us.


Global Liquidity Climbs A Peak

by Michael J. Howell17. May 2013 11:01


Global Liquidity rose again in April 2013 to a GLI reading of 65.2 ('normal range' 0-100), or the highest since October 2009. Of more interest, is the fact that without the drag from a tight Eurozone and sluggish EM, the Global Liquidity Index (GLI) would probably be over 75.



Gold: There is No Conspiracy!

by Michael J. Howell19. April 2013 14:02

The recent plunge in the US dollar gold price is unsettling but it reflects no dark forces and no sinister conspiracy by Central Bankers. The reason is the strong US dollar, and this strength maybe unusual for this stage of the business cycle, but it is driven by underlying liquidity forces. Specifically, when our PSL index exceeds the Fed CBL index the dollar soars. This is true now, with a strong Fed outpaced by even stronger private sector flows underscored by corporate revenues, household recovery, renewed shadow bank lending and shale oil cash. In short, its economics not politics that is the problem for gold.

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