All current evidence points to the Speculation investment zone, according to our models. With Global Liquidity conditions set to further deteriorate over next 6-12 months, paced by Central Bank tightenings and slowing private sector cash flows, we expect 2015 to be a year of Turbulence. Our latest TSS reports published today for DM and EM detail the appropriate investment strategies.

Latest data for the month to end-October 2014 showed our GLI (Global Liquidity Index) rising a tad to 43.8 fom 43.0 in September ('normal' range 0-100). Global Liquidity remains below average and at levels associated with a step-up in market volatility and a step-downwards in future economic activity. Liquidity conditions remain high in the US at 67.9, but continue at low index levels of 21.3 in the Emerging Markets. The only liquidity bright spot in EM is India.

Falling Global Liquidity has heightened risks. Bonds are sounding persistent warnings that monetary deflation is back. Deflation is bad for equities and bad for economies. This report analyses the implications and predicts a new QE4

There are few bright spots in the latest GLI (Global Liquidity Index) data which shows a fall in the month to end-September 2014 from an index of 48.0 ('normal' range 0-100) to 45.0. Liquidity conditions are sub-par and this means three things (1) flattening bond yield curves and strong bonds; (2) increasing market volatility and (3) softer economies in the future. The main causes of weak liquidity are that Central Banks are not pumping sufficient liquidity; the private sector is suffering poor cash flow growth and that liquidity in many international markets is negatively leveraged to the strong US dollar. This is not yet 2007/08 again but it looks to us very much lik 1997/98!

The GLI (Global Liquidity) leading index of international capital and liquidity movements was slightly higher in July 2014 at 45.8 ('normal' range 0-100), from 44.6 in June. Developed economies have much stronger liquidity at a 62.5 index level, than Emerging Markets at 16.7. Headline global liquidity conditions are broadly unchanged over the past four months and remain a tad below average, but this disguises two major undercurrents: (1) there is an on-going switch in the direction of capital flows from Developed to Emerging Markets, even despite the fact that capital is again, as we write, quitting Russia; and (2) private sector liquidity is either weak or weakening, and Central Bank liquidity is either generally firm or strengthening.

The Global Liquidity Indexes (GLI) measure broad monetary flows through World financial markets. They are leading indicators of future asset prices and economic activity. Our 80 country GLI aggregate inched down in June 2014 to an index of 47.8 ('normal' range 0-100) from 48.3 in May. The GLI can be broken down into an Emerging Market (EM) component, which is low but managed to rise to an index of 24.1 last month and a Developed Market (DM) component, which still stands at high index levels of 65.4. The DM index dipped a tad last month but is largely unchanged since end-2013, whereas the EM index gained 3.7 points from May and is 7.8 points up over six months.

Latest weekly data from Tokyo shows that the Bank of Japan significantly upped its net liquidity provision to Y153 trillion from Y136 trillion, and compared to only Y108 trillion four months ago. The BoJ's effective balance sheet is now expanding again at a 70% annualised clip over the past 3 months. Yen down...stocks up?

There are finally signs that Emerging Market liquidity is bottoming out. According to our latest GLI data, end-May 2014 saw a rise in the EM liquidity aggregate to 22.7 (‘normal’ range 0-100) from 18.5. EM liquidity is still well-below its trend, but at least it is not deteriorating as rapidly. End-May data show a strong rise in Central Bank liquidity to an index 46.5 from 39.6, helped by recent currency strength which has given policy-makers more scope to monetize inflows. Admittedly, EM private sector liquidity at 17.9 continues to look weak.

There are finally signs that Emerging Market liquidity is bottoming out. According to our latest GLI data, end-May 2014 saw a rise in the EM liquidity aggregate to 22.7 (‘normal’ range 0-100) from 18.5. EM liquidity is still well-below its trend, but at least it is not deteriorating as rapidly. End-May data show a strong rise in Central Bank liquidity to an index 46.5 from 39.6, helped by recent currency strength which has given policy-makers more scope to monetize inflows. Admittedly, EM private sector liquidity at 17.9 continues to look weak.