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Global Liquidity Growth

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I was sent a very interesting chart (sorry, I don't know how to post a link!) detailing Global Liquidity Growth since 1984.

Global Liquidity = US Monetary Base plus foreign USD reserves.

Anyway, the rate has only hit 0% or under three times; in 1990, 1998, and 2001. The first of these oversaw a HPC but the last two only brought about stock market falls.

In mid 2004 Global Liquidity Growth hit 20% but has now plummetted to 2%.

This tells me that everything is not rosy in the garden, far from it. On past evidence we can either look forward to a stock market crash and/or a house price crash. Or is it really different this time?????

These are clear unspun FACTS.

The good news for us bears is that when global liquidity dries up things happen and quickly.

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I'm not sure what metric you're refering to but M3 growth is higher than ever.

soon to drop to zero though ;)

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Do you have any links to articles?


Go to; www.investorsinsight.com

Then go to "outside the box" archived articles.

The chart is under the heading 'yield curve conundrum'.

Perhaps one of you technical could post it as a link!

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Here is some context as a vague timeline

Monetarism and Volker's policy on inflation > black monday and double-dip > 89 crash/recession/housing crash > late 97/98 Asia crisis, Russian debt default, LTCM collapse > 2000/01 dotcom/dow crash and Enron/Worldcom/Tyco et al. > 9/11 injection of liquidity > Iraqi war dip > 2006 oil induced inflation lead global asset price collapse?

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I find this chap, Philip Coggan, usually takes quite a balanced view. Worth a reasd if you're concerned that reducing the carry trade may upset the economic applecart!

The Short View: Carry trade crumbles at the edges

By Philip Coggan, Investment Editor

Published: February 23 2006 17:19 | Last updated: February 23 2006 17:19

The Bank of Japan clearly signalled on Thursday that it would tighten monetary policy as Japan moves out of deflation and the economy continues its recovery. Governor Toshihiko Fukui also said the central bank would return interest rates (effectively zero) to a neutral level at some point.

As on previous occasions when the markets anticipated monetary tightening, the yen rose against the dollar and Japanese government bonds fell in price, causing yields to rise.

Tighter Japanese monetary policy threatens the “carry trade”, through which investors borrow in yen, to buy assets with potentially higher returns. Thursday’s yen rise was accompanied by modest falls in metals prices, although not on the scale of the sharp falls seen earlier this month during periods of yen strength. Commodities are in effect zero-yielding assets so it makes sense that they will perform well when interest rates are low, and the cost of carry is minimal.

The carry trade has crumbled at the edges this week, with the Icelandic krona falling sharply after a debt downgrade by Fitch, the rating agency. The krona’s double-digit interest rate had attracted speculative money but recently some investors have become concerned about Iceland’s large current account deficit. Some hedge funds, such as Hugh Hendry’s Eclectica, had accordingly gone short of the krona (in other words, bet on a fall in the currency).

The krona sell-off prompted weakness in other emerging market currencies on Thursday, as speculators cut their high-yielding positions.

The carry trade could be threatened from several directions in coming months. Thursday’s strong Ifo survey increased expectation that the European Central Bank would move to raise interest rates in March, while investors are coming round to the idea that new Federal Reserve chairman Ben Bernanke will push US short rates to at least 5 per cent. That could mean all three of the world’s leading central banks are tightening policy at the same time.

Tighter monetary policy will both increase the relative attractions of holding cash and increase the cost of financing leveraged positions. That could lead to a rush for the exits in some markets, of which this week’s sharp decline in the Icelandic krona may be an omen.

and today

The Short View: Goldilocks and the bulls and bears

By Philip Coggan, Investment Editor

Published: February 28 2006 17:55 | Last updated: February 28 2006 17:55

The bulls and bears have been battling it out in global equity markets and, until Tuesday at least, the bulls have been winning. As of Monday’s close, the FTSE World index was up 5.2 per cent in dollar terms since the start of 2006, while the MSCI Emerging Markets index was up 11.9 per cent.

The bullish argument is a variant of the “Goldilocks scenario” whereby the world can achieve robust economic growth without inflation. Six years ago, technological change was seen as the driver; this time, it is the emergence of India and China, which have lowered costs for the corporate sector in the rest of the world. Not only has this delivered a better growth/inflation trade-off, it has also meant, say the bulls, that profits can form a higher proportion of gross domestic product than before.

The bears have countered that these developments have led to enormous imbalances, in the form of the US current account deficit or high levels of consumer debt, that will eventually have to be rectified. As yet, however, there has not been a trigger that might cause US consumers to stop spending or overseas investors to lose confidence in US assets.

Meanwhile, the recycling of Asian current account surpluses and petrodollar revenues has led to a “chase for yield” that has driven asset prices higher round the globe. Higher asset prices have, in turn, bolstered consumer confidence, creating a virtuous circle.

The bears believe that this will eventually break down in the face of monetary policy tightening. The Federal Reserve looks set to raise US interest rates at least twice more; the European Central Bank is widely expected to push rates up on Thursday; and Japan has made it clear it will be withdrawing some of its monetary stimulus.

This could be the trigger, because, with interest rates at zero, the yen “carry trade” has been used to finance many speculative investments. But Eric Lonergan, the Cazenove strategist, believes even this shift may disappoint the bears. “Quantitative easing had no discernible effect on asset prices, the yen or the Japanese economy,” he says. “The end of quantitative easing should be equally irrelevant.”

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