About liquidity, but how much is it?

I have spoken many times about money in circulation , but since the issue of liquidity is always on the agenda, I wanna to report a news that has been neglected, even if it's important, in my opinion.

The Federal Reserve announced (see release) review of the measures relating to money in circulation and its components, to incorporate the results of the annual adjustment of seasonal factors, monthly and weekly, in addition to a new quarterly benchmark.

The new data (detailed in the release), compared with those published previously and reviewed, have lowered the growth of M2 for the first half of 2008, while they raised it for the second half.

But above all, they led to a surge in the dynamics of growth of M1, or the liquid component of the monetary aggregates, as represented largely by notes and coins issued by the central bank: without any doubt this growth represents the injection of new liquidity into the system by the Fed on which was written several times.

Here's a chart:

It's more than eloquent in itself, I only have to say that it represents an estimate of the growth of the M3 aggregate, which the Fed is not public anymore.

Au revoir

Original post: Liquidità, ma quanta ce n'è?

ECB rates are falling, but ....

EMU: economy and rates are still braking ...

In recent months the activities in Eurozone have worsened due to the global financial crisis and in particular, due to the consequent weakening of exports, especially to the U.S. and emerging markets. Difficulties also in the property sector.

Spain, Ireland, Portugal and Greece are under stress for some time, but recent data have indicated a sharp deterioration also in Germany, France and, of course, Italy.

The economic downturn will continue for much of 2009, however, differently to what probably will happen in the U.S. and UK, companies and families in Eurozone not have to suffer a prolonged deleveraging and also will begin to benefit for a lower inflation, which should continue to decline (if oil will allow that ...).

In this context, as you know, on 15th January the ECB cut rates from 2.5% to 2% (back to the lowest of 2003 and 2005, when only 3 months ago they were still 4.25%) and, moreover, could further reduce it, although not immediately, to 1%, according to many analysts.

But the ECB seems to fear the ZIRP

What is surprising today, however, is the quite different (and slower) speed of reaction of the Central Bank in Frankfurt viz-à-viz the U.S. Fed, which is typical symptom of a less willingness to adopt a policy of zero interest rates (ZIRP) .

Is good? If you look upon the cross EUR / USD the answer should be negative, given that the market is punishing the European currency, betting, therefore, a greater potential for recovery in the U.S. compared to Eurozone.

But the Euro is suffering also against other currencies, losing 7% against the Swiss franc and 5% against the Yen just last month. In the last 2 weeks, finally, it has lost 8% against the sterling pound, which had marked at 98 pence on December 30th last year, records of all time.

Looking to other aspects, however, seems increasingly anachronistic the attempt of the ECB President, Jean-Claude Trichet, to defend its mandate to fight inflation, arguing that this still leads to greater stability for those countries, such as Italy, that before the Euro suffered in particular for the growth of prices.

I refer specifically to the continued widening of the spread of return on bonds issued by countries less "virtuous" in relation both to the rates of German government bonds, which reached the highest levels since the Euro was created, and to the interbank short-term rates (for which, however, one can truly claim the so called 'euroconvergence")

This - it's important to be clear - is in fact another brake on the European recovery, as it reduces the leeway of the governments plans for any fiscal stimulus. And not only for the much-criticized Italy, of course, but also for many other countries, for example, Spain, where the deficit is expected to reach 6% of GDP, Ireland (7.2%) and Portugal (3.3%). It's no coincidence that the credit rating agency Standard & Poor's recently downgraded Greece (from A to A-) and put under observation the AAA rating of Spain and that of other countries such as Austria and Ireland.

Government bond at risk

While inflation will remain probably low for a long time, and so the short-term rates, I think we will see a gradual rise in bond yields (which push the prices down) over the next 12 months.

The rate cuts made by the Central Bank will not be many, the issue of government bond is expected to increase during the remainder of 2009 and economic activity will begin a phase of recovery. Not least, sooner or later, the tendency to make only safe investments will decline, leaving room for a greater propensity to take risks.

As mentioned elsewhere, government bonds seem to have less appeal from a fundamental point-of-view and, therefore, more and more risk (almost a contradiction, for those who still consider them always the "risk-free" alternative!).

Have good weekend

Original post: Tassi BCE in calo, ma per quanto?

More about Kondratiev

I have had time only today to read an interesting post of my colleague Dream Theater on the K cycles and their application to financial markets today.

In this regard, if indeed the turning point and the start of the (super)cycle of economy and markets will be 2010, I think we could certainly call "lucky", given the negative trend of recent months, but also in the light of data released more recently: for example, according to the ADP report of yesterday (see chart below), during the month of December 2008 would have been lost as well as 693mila jobs!

That said, however, I returned to my mind an old post - dating back to 30 July 2007 and inclusive of a comment of Dream Theather - in which I described the theory of the waves of Kondratiev, focusing on economic supercycles during 50 to 60 years, of which the fifth, a.k.a. the Age of informatics and telecommunications, would be still in progress and would have another few decades of life ...

Certainly the events since 2007 easily expose this idea to strong criticism, because today the financial world is considered - by almost everyone - to the brink of the abyss. It may be, however, that in a few years sentiment will be changed (for the better), hence the current can be seen as a correction, even if marked, rather than as the end!

Also on that article, however, my attention was directed mainly to the market of commodities and - despite the ups and downs in recent months and in particular, the bursting of the bubble (in this regard, refer to this predictive post and to the updated chart below) - I confirm my opinion that the basic trend remains structurally bullish, given the same imbalance between supply and demand: maybe the market not come back quickly on reckless levels of last July, but a gradual uptrend should resume again.

Original post: Ancora su Kondratiev

Record outflow from funds in 2008

According to the EPFR Global, which deals since 1995 in collecting and providing data on the asset management market in the world, investors in 2008 have removed some 320 billion from mutual funds (excluding money market products), a record in absolute terms and in terms of percentage of assets managed, in one of the largest movements of flight to quality that the industry has ever seen. The year 2007 was concluded with positive net inflows.

Other than losses for redemptions above you must also consider the disappointing performance, especially on equity. The result of potential outflows, however, is underestimated by the fact that many hedge funds during the year have suspended or limited / slowed operations redemptions. Perhaps questionable decision, but also permitted (at least in most cases) to the meaning of regulation.

Many of the redemptions have been fed in the type of monetary funds, whose total assets under management reached a record level, $ 3720 billion. Yet even this type of funds has not been immune from the crisis, especially for the exhibition more or less directly to the world of residential mortgages, even subprimes. In terms of performance, in addition, often the numbers were extremely low, sometimes close to zero, both for investors for the same management company.

The trend of net outflows seems being slowed down, indeed, in the final weeks of the year, is being reversed: the equity funds, which closed 2008 with outflows totaling $ 233.5 billions (see chart below), in December saw positive flows of $ 32 billions, while monthly outflows from fixed income funds were limited to 3.5 billion, less than in previous months. The figures include both retail investors than institutional, excluding money funds.


Certainly the results of a single month can not be considered conclusive for the development of a new trend, but it is a signal that I think potentially favorable for stabilizing the equity markets: investors, including institutionals, are perhaps beginning to accumulate positions on equity, based on fundamentals of medium to long term, rather than on technical or short term reasons, and in the (usual) hope that the worst is now behind us.



Original post: Deflusso record dai fondi nel 2008