Emerging Markets GLI (Liquidity Index) May 2015 Update

by Michael J. Howell13. May 2015 15:39

April 2015 has proved to be a strong month for Emerging Market Liquidity with the EM component of our GLITM (Global Liquidity Index) hitting 41.0 (‘normal’ range 0-100) from 32.4 at end-March. Although the index is still below the neutral threshold of 50, the EM Liquidity trend is plainly up and reinforced further by the early May announcement of more Chinese easing.

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Global Liquidity Index (GLI) May 2015 Latest Release

by Michael J. Howell12. May 2015 17:36
The Global Liquidity Index (GLI) rebounded in April 2015 to 40.3 from 37.1 in March ('normal' range 0-100). Overall, World liquidity conditions remain sub-par, with the index at or below average now for eight months: a backdrop consistent with slow, but not recessionary, economic activity. Within the total, regional trends show greater divergence. EM is rising fast, but the US is now sub-par.

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Global View May 2015: Could Weak 2015 GDP Force The US Dollar to Join The Global Currency War? Or Why Gold May Soon Start to Shine

by Michael J. Howell9. May 2015 17:51

New Report Published: The strong dollar now leads the field of excuses for the (un)surprisingly weak economy in 2015. US policy makers are naming and shaming their currency to such an extent that it questions whether the greenback could soon join the on-going global currency war. If so, who wins? Gold is looking the favourite since it is especially sensitive to Central Bank actions.

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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.

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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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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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March Update - US Looking Good, Japan Less Good and China Looking Bad

by Michael J. Howell12. March 2014 20:05
US Liquidity remains sky high on our indexes, which will underpin a strong economy this year. In contrast, China shows no signs of monetary easing (PBoC index 40.0) and the familiar further sight of weak overall Chinese liquidity (index 24.5) and weak cross-border capital flows to EM will add more downward pressure to Asian markets. However, what is lately a new sign is the sharp fall in Japanese private sector liquidity. We first noted this a month or two ago, but suggested then that it might be the benign accompaniment to domestic economic pick-up to the extent that it was reflecting a diversion of funds from the financial to the real economy. However, the recent appearance of poor monthly economic data may tell us that something else is underway, and perhaps the economic fall-out from a weak China is spreading? See latest Global Liquidity Update Report.

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March 2014 - Latest Global Liquidity Data (GLI)

by Michael J. Howell12. March 2014 19:37
Headline end-February 2014 GLI (Global Liquidity Index) data confirm a clear inflection in overall data and, perhaps, even in the more buoyant Developed Economies, too? Admittedly the GLI ticked up slightly through the month to 53.4 ('normal' range 0-100) from a sub-par 47.9 in January. World Liquidity may still be just above its average; however, these values stand well-below the recent 61.9 peak. Excluding EM, the picture is far better, with the GLIX (excluding EM) rebounding to an index value of 75.3 or again close to its recent 76.1 December 2012 peak. Emerging Market liquidity remained at a low index value of 13.3, likely foreshadowing an earnings recession across the sector.

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Global Liquidity Update

Is QE Inflationary?

by Michael J. Howell17. February 2014 09:09
Now that tapering of QE is starting the debate about money and inflation has resurfaced. Where do we stand? Does printing money cause inflation? First define your terms. Do we mean high street inflation, asset price inflation or something else? Second, what do we mean by money? Money has two forms: as means of purchase and as means of settlement. Central Bank QE can change the volume of both, but in the short-term it has most influence over means of purchase that start the economic circuit. QE itself is largely an intermediating process that channels funding to credit providers. QE serves as a direct substitute for other types of funding, such as traditional bank deposits, which is what economists by convention term 'money supply'. However, lately QE has replaced non-deposit funding, such as wholesale funding, e.g. repos and commercial paper, which collapsed post-Lehman. The supply of money is not necessarily affected by this increase in funding, but the volume of credit should be. Therefore, we need to reframe the question? Does an increase in funding cause: (a) an increase in high street inflation and/ or (b) an increase in asset price infation? By lessening the need for forced sales of collateral and reducing rsk premia on asset prices, QE should certainly boost asset prices. Among these a key one is the exchange rate, say, measured in terms of gold. If QE causes the exchange rate to devalue, then it is possible that cost pressures will rise and high street inflation kick-off. However, this surely depends on the flexibility of business, the state of labour and product markets and the degree of spare productive capacity. In short, Central Bank QE represents monetary not cost inflation, since high street prices depend more on costs and asset prices more on money, the vent of QE typically tends to be faster asset price infation. So, does QE cause inflation? Yes, but no! See: The Quality Theory of Money, CBC report 2006. If you believe that 'money' is important the quantity theory works, but if you figure velocity matters too, then you need to think about the quality or liquidity theory of money.

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Is QE Inflationary?

by Michael J. Howell17. February 2014 09:09
Now that tapering of QE is starting the debate about money and inflation has resurfaced. Where do we stand? Does printing money cause inflation? First define your terms. Do we mean high street inflation, asset price inflation or something else? Second, what do we mean by money? Money has two forms: as means of purchase and as means of settlement. Central Bank QE can change the volume of both, bu in the short-term it has most influence over means of purchase that start the economic circuit. QE tself is largely an intermediating process that channels funding to credit providers. QE serves as a direct substitute for other types of funding, such as traditional bank deposits, which is what economists by convention term 'money supply'. However, lately QE has replaced non-deposit funding, such as wholesale funding, e.g. repos and commercial paper, which collapsed post-Lehman. The supply of money is not necessarily affected by this increase in funding, but the volume of credit should be. Therefore, we need to reframe the question? Does an increase in funding cause: (a) an increase in high street inflation and/ or (b) an increase in asset price infation? By lessening the need for forced sales of collateral and reducing rsk premia on asset prices, QE should certainly boost asset prices. Among these a key one is the exchange rate, say, measured in terms of gold. If QE causes the exchange rate to devalue, then it is possible that cost pressures will rise and high street inflation kick-off. However, this surely depends on the flexibility of business, the state of labour and prduct markets and the degree of spare productive capacity. In short, Central Bank QE represents monetary not cost inflation, since high street prices depend more on costs and asset prices more on money, the vent ofr QE typically tends to be faster asset price infation. So, does QE cause inflation? Yes, but no! See: The Quality Throry of Money, CBC report 2006

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