If you compare actual 10y with synthetic estimate from agency mortgage market it is just over 100bp lower. This is YCC arising because of change in mix of issuance. This gap could close if mix retuned to normal. Outside of this effect, rising liquidity will cause YC to steepen. FF may fall 100-150 BP. Answer hence depends on assumptions, but they could given time. I don't believe in recession until 2026 which makes the prediction more likely I suppose!
Hi Michael, I don’t understand why you said liquidity is fungible while ‘Whereas, Fed liquidity injections tend to drive World financial markets, given the dominance of the US dollar, PBoC actions impact the World real economy and commodity markets because of China’s giant industrial footprint.’ As China has foreign exchange control, how can its liquidity contribute to the global market?
Hi Michael, I would like to know more about the concept of collateral multiplier, which you seldom mention in the weekly update. You said collateral multiplier is the ratio between Global Liquidity and the Shadow Monetary Base while in the weekly update you said 'Global liquidity is underpinned by the Shadow Monetary Base (SMB). The SMB comprises Central Bank (CB) liquidity as well as collateral (bonds)'. it seems to me that both SMB and global liquidity consist of similar components. The ratio of two elements with similar components becomes the collateral multiplier? Could you please explain a bit further? Why do you seldom mention it in the weekly update? How significant is it for us to understand the whole picture?
A closer look beneath the surface show two things going on ahead of the GFC. At the time we spotted one (the sharp fall in Fed Liquidity in the Summer of 2008) but the other (tightening by the PBoC ahead of the 2008 July/ August Olympics) we ignored because Chinese banks grabbed more liquidity from the Euro$ markets. We should have joined the dots! But your point is well-taken. Its hard to rely on one indicator for investment. We try to correlate technicals, eg sector performance, with liquidity and cross-check this with the bond market and real economy data.
It's noteworthy that the chart shows global liquidity peaked around 2009 in the midst of the GFC
(the US recession started officially in Dec 2007), albeit there was volatility and a sharp drop in 2008, which then rebounded. This would imply caution in using this data as a timing tool for risk assets but perhaps an indicator if risk assets are getting too detached from underlying liquidity/SMB?
The argument is similar to that airing about China where M1 growth is similarity weak. What matters in our view is credit growth. Traditional money supply measures retail bank deposits. A few decades ago they were the dominant for of finance for lending but today much lending is capital market funded. The slowing of the Ms may be 'disintermediation' between different accounts or between different savings institutions. In China credit growth is decent and in the US it is picking up. There is no case for strong economic growth in either economy, but there not a compelling case for recession either.
@Michael, seperate from liquidity could you comment on the monetary aggregates and Steve Hanke’s concern about the lack of growth rate in M2 leading to a recession, I am interested in your thoughts on this. Thank you
Good recap and great refresher on what drives liquidity and which variables are worth watching. Would be interesting to see which obvious variables tested, didn’t show worthwhile correlation and which others bear watching.
If you compare actual 10y with synthetic estimate from agency mortgage market it is just over 100bp lower. This is YCC arising because of change in mix of issuance. This gap could close if mix retuned to normal. Outside of this effect, rising liquidity will cause YC to steepen. FF may fall 100-150 BP. Answer hence depends on assumptions, but they could given time. I don't believe in recession until 2026 which makes the prediction more likely I suppose!
Hello Michael do you believe the 10y will rise to 5.25 before the recession?
Hi Michael, I don’t understand why you said liquidity is fungible while ‘Whereas, Fed liquidity injections tend to drive World financial markets, given the dominance of the US dollar, PBoC actions impact the World real economy and commodity markets because of China’s giant industrial footprint.’ As China has foreign exchange control, how can its liquidity contribute to the global market?
Hi Michael, I would like to know more about the concept of collateral multiplier, which you seldom mention in the weekly update. You said collateral multiplier is the ratio between Global Liquidity and the Shadow Monetary Base while in the weekly update you said 'Global liquidity is underpinned by the Shadow Monetary Base (SMB). The SMB comprises Central Bank (CB) liquidity as well as collateral (bonds)'. it seems to me that both SMB and global liquidity consist of similar components. The ratio of two elements with similar components becomes the collateral multiplier? Could you please explain a bit further? Why do you seldom mention it in the weekly update? How significant is it for us to understand the whole picture?
Excellent summary
Much lending especially in finance is outside traditional retail banks. This lending occurs via repo markets. Which is why collateral is key.
A closer look beneath the surface show two things going on ahead of the GFC. At the time we spotted one (the sharp fall in Fed Liquidity in the Summer of 2008) but the other (tightening by the PBoC ahead of the 2008 July/ August Olympics) we ignored because Chinese banks grabbed more liquidity from the Euro$ markets. We should have joined the dots! But your point is well-taken. Its hard to rely on one indicator for investment. We try to correlate technicals, eg sector performance, with liquidity and cross-check this with the bond market and real economy data.
Thank you ! That's another great piece. However I still don't get the idea and the role of 'Wholesale banking" .....
It's noteworthy that the chart shows global liquidity peaked around 2009 in the midst of the GFC
(the US recession started officially in Dec 2007), albeit there was volatility and a sharp drop in 2008, which then rebounded. This would imply caution in using this data as a timing tool for risk assets but perhaps an indicator if risk assets are getting too detached from underlying liquidity/SMB?
The argument is similar to that airing about China where M1 growth is similarity weak. What matters in our view is credit growth. Traditional money supply measures retail bank deposits. A few decades ago they were the dominant for of finance for lending but today much lending is capital market funded. The slowing of the Ms may be 'disintermediation' between different accounts or between different savings institutions. In China credit growth is decent and in the US it is picking up. There is no case for strong economic growth in either economy, but there not a compelling case for recession either.
@Michael, seperate from liquidity could you comment on the monetary aggregates and Steve Hanke’s concern about the lack of growth rate in M2 leading to a recession, I am interested in your thoughts on this. Thank you
Good recap and great refresher on what drives liquidity and which variables are worth watching. Would be interesting to see which obvious variables tested, didn’t show worthwhile correlation and which others bear watching.
This is very revealing. Thank you.