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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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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Chinese Liquidity and Capital Flows to all Emerging Markets, 2005-2013

by Michael J. Howell27. January 2014 11:53

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The Real Tapering Threat Is Not The Fed, but China

by Michael J. Howell25. January 2014 11:50
Emerging Market weakness is supposedly all down to Washington and the threatened tapering of QE policies by the US Fed. Simple but wrong. The evidence from our regular studies of World capital flows tells a very different story. Of course, no one should suggest that Fed tapering when it comes will be positive for EM, but the underperformance is caused by something bigger. 15 years ago EM economies were tied into the US consumer cycle and US policy mattered a lot. Lately EM have moved to supply the Chinese capital goods cycle. In short, Chinese monetary policy now matters and the tapering by China's PBoC (Central Bank) over the past 18 months has had a devastating effect on EM. Chinese policy makers are still struggling to contain the excesses of a boom launched five years ago at the time of the 2007/08 World financial crisis: they may have to wrestle well into 2015 before the tide turns. The result is weak Chinese capex; a fast-slowing economy and continuing fall-out across EM. If the culprit was genuinely American monetary policy surely the smaller Frontier Markets, which are more dependent on dollar capital flows, would now be in the eye of the storm? Yet they like Wall Street have been booming. The EM puzzle is explained by Chinese tapering not Fed, and it may last another year!

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