US Fed Policy March FOMC...Hawkish?

by Michael J. Howell20. March 2014 07:18
March FOMC clearly worried the 5-year fixed income market. It should have hurt stocks more. The statement may not be outright hawkish, but it is the most hawkish in a relative sense for years. The Fed underscored its commitment to play up 'forward guidance' and run down QE with another $10 bn lopped off from April. This suggests to us that they are concerned about financial stability and are beginning to want markets to price in more risk: indeed Chairman Yellen essentially said so much in discussion of risk premia. But the bigger news may prove clarification on the Fed's reaction function, since it now seems clear that 2% inflation is no longer a target but a limit. This is a major change, if correct, since higher than 2% inflation will mean a faster move in rates. We have been warned! It confirms to us that the Fed are joining the PBoC in tightening policy. Not yet bearish, but plainly not bullish. See recent report: The Titans Tighten, March 2014.

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Consequences of a Weak China

by Michael J. Howell18. March 2014 07:36
We are currently seeing EM dragged down by three largely external forces: (1) Western and particularly US capital has restructured post-Lehman and lowered its break-even costs to such an extent that production is re-on shoring; (2) China has put on her monetary brakes fairly 'hard'. This is disrupting regional capital flows and unhinging the Asian supply-chain. This will likely be a long and not a short-term monetary squeeze, and (3) in the 1960-90 period the Yen/US$ drove the tempo of the Asian business cycle, and may be doing so again given the Yen's recent collapse. In short, American restructuring, Chinese downsizing and Japanese competitiveness are doing the damage. No mention of US tapering, lack of EM reform and/or EM economic imbalances. They are simply not the issue. Since bad news in China will get worse in te near-term tred carefully! See latest EM research report.

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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

Chinese Liquidity, Latest GLI Shows Low Scores

by Michael J. Howell21. February 2014 11:30

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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, 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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Global Liquidity: Latest Monthly Data

by Michael J. Howell11. February 2014 12:22
New Fed Chief: new investment era? Ben Bernanke has left office and he appears to have taken the US liquidity boom with him: Overall US liquidity recorded an index score of 74.1 in January, or down from the October peak of 78.4 (‘normal’ range 0-100). Alongside, our Global Liquidity Index (GLI) slipped below average in January to 47.0. It too has now definitively retreated from its earlier November high of 57.7. This pull back is confirmed by a parallel index of very short-term credit and money market spreads which slipped to 67.1 in January, again from mid-year highs of 76.9. Admittedly, this aggregate picture looks worse because of still terrible Emerging Market Liquidity conditions: but if EMs were so important on the way up, it is only correct to include them on the way down. Contact us for full data access and more detail.

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Money, Credit and 'Global Liquidity'

by Michael J. Howell10. February 2014 09:07
Another liquidity boom, another bubble! A recent report defines and track what we mean by liquidity, which in essence is money, we can spend, in all its multiple forms, including bank money and shadow bank money. Summed together this totalled over US$90 trillion at end-2013, or 5 times US GDP. The financial sector component of this liquidity drives asset prices. Global liquidity makes the modern world go around. However, many wrongly hark back to money supply measures. If you still think only high street banks matter, then dream on. They are less than half the story. The key to understanding Global Liquidity is to think 'debt' and particularly the role that collateral plays. Fair enough, an expansion of Central Bank liquidity will facilitate credit expansion, but so too may an expansion of Treasury debt issuance because it could increase the economy's pool of 'good' collateral. The collateral multiplier, akin to the bank reserve multiplier, was a major reaon behind the last bubble. The latest deflating bubble as we have been warning is Chinese credit and its top-heavy shadow banking sector. It is the reality of Chinese tightening not US tapering that is currently hitting EM. Just think that since 2005 Global Liquidity is 80% higher, but Chinese Liquidity is up a whopping 430% and only now is starting to skid.

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US Liquidity More Than Two-and-a-half Times Money Supply, End-2013

by Michael J. Howell31. January 2014 13:47

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