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

by Michael J. Howell31. January 2014 13:47


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


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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Capital Flows to EM 2013

by Michael J. Howell23. January 2014 13:44
2013 saw another net outflow of money from EM Financal assets. We reckon around US$31 billion left EM stocks, bonds and credit markets last year. This compares to a net outflow of US$166 billion in 2012 and a net outflow of US$21 billion in 2011. For the record 2009 and 2010 were big positive years for EM seeing nearly US$600 billion flow in. We may be near the bottom in some EM markets. However, our overall EM risk appetite index at minus 6 stands well-above its minus 40 index lows, but admittedly still below the normal plus 40'ish peaks. In short, we should still wait a little before venturing back.

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Time To Buy Commodities?

by Michael J. Howell23. January 2014 13:38
Latest GLI liquidity data highlights The recent drop in private sector liquidity across a number of economies suggests that money is starting to be diverted into a strengthening World economy. Ignoring the on-going problems in EM, which is stumbling rather than contracting, the faster pace of DM growth should begin to lift commodity markets. Given the huge underperformance of commodity equities in recent years, there may be an opportunity here. Certainly, this being an entirely 'normal' cycle in our view suggests that commodities are due a run. Provided that the dollar/ gold axis remains stable this year, commodity equities might be worth buying.


Risk Appetite Data Still Rising

by Michael J. Howell14. January 2014 21:12
Risk Appetite can be measured by deviations of actual portfolio composition away from average levels, country-by-country. We do this now for more than 50 markets Worldwide by subtracting Government bond exposure from equity exposure, normalising the result and expressing it in index form. The index tends to range between +/- 50: risk asset markets tend to peak out around an index of 40 and readings of 30 and above suggest some prudence needs to be taken. Latest end-2013 puts developed markets at 17.1 and emerging markets at minus 3. Japan has fallen back to 10.3, but the UK exceeds 22 and the US at 30.8 is straying onto more volatile ground. The party is not over yet, but it may be about to get more rowdy! For full list see CBC Add-in database.


Are We All Behind the Curve? What Are Bonds Telling?

by Michael J. Howell14. January 2014 08:25
The medium-term yield component of long-term bond yields has been rapidly expanding – we measure this by ‘bootstrapping’ the implied 5-year yields, 5-years out (or 5s at 5).This implied forward yield, or ‘core’ yield, is the major influence on the more widely-quoted 10- year spot rate, the traditional bond benchmark. Think of these spot yields as comprising 'core' component, refecting economics, and a short-term premium or discount measuring the effect of monetary policy. The 'core' component provides the most efficient guide to where future spot yields will settle as roll-down effects dissipate. In the past six months, US 5s at 5 moved up by 60bp to 4.26% and they stand at a 127bp yield premium to spot 10-year Treasuries. In Germany, the 5s at 5 yield rose by 49bp over the period to 3.27%, or a 116bp yield premium to 10-year Bunds. For the UK, the equivalent 5s at 5 yield hit 4.32%, up 48bp in six months, and also sit at 116bp premium to 10-year Gilts. Only in Japan did 5s at 5 fall (by 15bp) to 1.23%, although they are at a 49bp yield premium to 10-year JGBs. The 5s at 5 component is rising both faster than 10-year spot yields and is doing so because of increasing real interest rates. In turn, this may be because the marginal return on industrial capital is itself expanding once again, which we ascribe both to DM cyclical economic recovery and to the structural slowdown in China. The bottom line is that bond yields are not only rising faster than investors think, but the structure of forward rates tells us that they have already risen a lot. As we argue in a report published today, most investors are behind the curve.

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Global Liquidity Data End-2013

by Michael J. Howell12. January 2014 14:17
According to our latest calculations, the Global Liquidity Index (GLI) ended 2013 at a value of 53.8. Normal range 0-100. This was lower than November (56.9) and below the 2013 June peak of 61.5. Admittedly, major cross-currents between the EM (Emerging Markets) and DM (Developed Markets) drag down the overall total but even examining the buoyant DM liquidity data they confirm what looks like an inflection point. EM liquidity remains weak. The equivalent DM GLI hit 67.2 at end-2013, or down from its 70.1 November reading. Looking inside this data adds further colour since Central Bank Liquidity is sub-par and drifting, whereas the recently far more dynamic Private Sector Liquidity index is high but now fading.


Economics and Liquidity

by Michael J. Howell3. January 2014 11:27
Liquidity can be thought of as money serving as means of purchase, i.e. funds that 'start' the monetary circuit. Keynes realised that in a Capitalist economy liquidity and not savings determine the volume of investment, and reinforced later by Kalecki, that investment rather than consumption is the key dynamic behind profitability and economic growth. Liquidity has real effects because it changes the structure of production by increasing duration through portfolio effects and in the process raises the demand for long-dated financial assets, such as equities. Conventional economics not only muddles this by focussing on money as means of settlement, i.e. funds that 'close' the circuit, but it also confuses the price of money --the exchange rate -- with the cost of credit -- the interest rate. Interest is a category of profits and has little or nothing to do with monetary policy. However, attempts to 'fix' interest rates and ignore or 'float' exchange rates always creates instability. Thus, ever since the 1971 end of Bretton Woods and the more recent attempts to straightjacket interest rates into a Taylor Rule, the financial system has suffered a near regular 8 1/2 year repeating cycle of boom and bust. For example, markets saw peaks around end-1973, mid-1981, early-1990, mid-1998, early-2007 and should again around mid-2015. Within around a year of each peak they fell heavily. The way to mitigate the cycle is to stabilise exchange rates, not interest rates. Because liquidity is dominated by credit, the monetary system is debt-based and leveraged. Collateral becomes vulnerable when debt-repayment is compromised and so liquidity becomes hugely pro-cyclical. What's more, since in a crisis the only true collateral is legal tender aka Central Bank money, leverage can be extreme. After having moved down through 2007 and 2008, collateral and liquidity have been together moving up since 2009, helped by Central Bank QE. They still have a bit further to run, but be warned what goes up inevitably comes down. A 2016 Crash perhaps?


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