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world full of liquidity


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#21 CLK

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Posted 04 January 2007 - 05:18 PM

I'm amazed at how many hits fundo posts get.

Edited by CLK, 04 January 2007 - 05:19 PM.


#22 OEXCHAOS

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Posted 04 January 2007 - 07:28 PM

I think liquidity is sort of a technical matter. It has nothing to do with the fundamental quality of investment, only that there will likely be ample money for those investments deemed worthy. It's an indicator much like sentiment.

Mark

There was a topic on TV.....70% of the workers live from paycheck to paychck.....There is a store in my neighberhood that gives out advance payment on paycheck and charging high interest.....Now, tell that guy that goes to that store there is high liquidity.....He will turn around and say what are you smoking.....



Paul, this is de facto liquidity. He has no cash, and yet he can get some readily from the paycheck advance. Years ago, that fellow is in some hurt and going hungry. Now, he can juggle some debt and income (hopefully).

Now, this source of liquidity may dry up, but that's another matter. Here you are mistaking this hypothetical guy's lack of net disposible income with a lack of liquidity. That only shows his poor budgeting skills. The ability to get all manner of loans, is a sign of liquidity.

Mark

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#23 jawndissedi

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Posted 04 January 2007 - 08:37 PM

The ability to get all manner of loans, is a sign of liquidity.

Mark


On this we agree. Here's what is happening to the ABX (credit default swap index) for subprime loans originated in the second half of 2006:
Posted Image
If the cost of laying off subprime credit risk keeps soaring, how much longer will "all manner of loans" be available?
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#24 OEXCHAOS

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Posted 04 January 2007 - 08:49 PM

I would suspect that all manner of slightly less low quality loans will continue to be available unless things really start slowing. After all, those subprime loans were mispriced in the first place.

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#25 snorkels4

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Posted 04 January 2007 - 09:33 PM

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Sucking Sound Is Global Liquidity Drain: Mark Gilbert (Update1)

By Mark Gilbert

Jan. 4 (Bloomberg) -- The world's major central banks have stopped worrying about deflation and set about cranking interest rates as high as they dare. Policy makers trying to squeeze inflation, albeit nascent, out of the financial system risk sucking the life out of the global economy.

The cumulative effect of monetary policy changes in the U.S., Europe, the U.K. and Japan has been to drive the global cost of borrowing to its highest level in more than five years.

The so-called real interest rate, calculated by subtracting annual inflation rates from central bank lending levels in the four regions and adding the results together, surged to 7.8 percent in October, and is currently about 7.1 percent. That's up from as low as 2.7 percent in June, and compared with just 0.6 percent in the middle of 2004.

Dividing by the number of regions to derive an average global rate highlights the rapidity of the move; money now costs 1.8 percent, almost three times as expensive as it was just six months ago.

Monetary conditions have tightened rapidly since central banks started to wage war on inflation expectations. Weighting inflation-adjusted rates by gross domestic product shows global borrowing costs climbed to 2.4 percent in November -- a fourfold increase in six months, and compared with the average this decade of less than 0.8 percent.

Negative Rates

Real interest rates were negative in 2005 in the U.S., the world's largest economy, and in the euro area, averaging minus 0.18 percent in both cases.

The U.S. average was more than 1.6 percent in 2006, driven higher by a combination of Federal Reserve rate increases and slowing inflation. When real rates reached 3.95 percent in October, money became the most expensive since March 1998.

The rate is currently 3.25 percent, after the annual consumer price index rebounded to 2 percent in November from 1.3 percent in October. Based on economists' forecasts in Bloomberg surveys published last month, the U.S. real rate is expected to be 2.3 percent at the end of 2007.

Ian Morris, chief economist at HSBC Securities USA Inc. in New York, predicts the Fed will lower its key interest rate five times this year, cutting it to 4 percent from 5.25 percent currently. A slumping housing market will crimp economic growth to a 1.9 percent annual rate from last year's 3.25 percent, he says.

Righting the Economy

Not everyone is convinced the Fed will be so proactive. Stephen Gallagher, the chief U.S. economist at Societe Generale SA in New York, expects two moves at most. ``We see the risks around our forecast to be for less action, not more,'' he wrote in a research report. ``The economy can right itself without significant rate cuts.''

European policy makers have consistently said they still regard monetary conditions as ``accommodative,'' a word used most recently by Luxembourg's central bank president, Yves Mersch, in a statement on the economy on Dec. 28. European Central Bank President Jean-Claude Trichet said Dec. 20 that the bank ``will do whatever is necessary to ensure price stability.''

Evidence of a sustained economic recovery, including German unemployment in December falling by the most since the nation's reunification in 1990, has emboldened rate-setters concerned about money supply expanding at its fastest pace in more than 16 years.

Inflation-adjusted borrowing costs in Europe climbed to an average of 0.6 percent last year, and are currently about 1.6 percent after six consecutive quarter-point increases drove the benchmark rate to 3.5 percent. Economists' median forecasts for ECB policy and consumer prices suggest the real rate will climb to 1.9 percent by December.

U.K. Policy

The real cost of money in the U.K. is currently 2.3 percent, up from 2 percent in September. With the Bank of England expected to keep its key lending rate unchanged at 5 percent this year, slowing inflation will drive real borrowing costs up to 3 percent by the end of the year, according to economists' forecasts.

The Bank of Japan is itching to act, after ending its zero interest-rate policy by lifting its overnight rate to 0.25 percent in July. Deputy Governor Toshiro Muto told Nikkei English News in an interview earlier this week that gradual rate increases are needed to ensure growth is sustained by avoiding ``sharp economic expansions and contractions.''

Record industrial production in November and an increase in core consumer prices, excluding fresh food, to an annual pace of 0.2 percent might be enough to make Japan the first major economy to raise interest rates in 2007 when the central bank's policy meeting concludes on Jan. 18.

End of Deflation?

``We project that the rate of increase in the consumer price index will gradually rise as the economy continues its long expansion,'' Bank of Japan Governor Toshihiko Fukui said in a Dec. 25 speech. ``However, the pace at which it rises should continue to be watched carefully.''

Japan's jobless rate dropped to an eight-year low of 4 percent in November. Unemployment in the euro area is 7.7 percent, the lowest since at least 1993, and 4.5 percent in the U.S., after declining steadily from a 10-year peak of 6.3 percent in June 2003. The number of Britons claiming jobless benefits fell by the most in almost two years in November, keeping the unemployment rate unchanged for a ninth month at 3 percent.

The ``giant sucking sound'' was the hyperbolic sound bite coined by Ross Perot in his 1992 campaign to become U.S. president, designed to scare voters into joining his opposition to the North American Free Trade Agreement by portraying jobs draining away to Mexico.

Workers in the major economies, already nervous that the economic future belongs to China, India and other emerging nations, don't want to hear the sucking sound of jobs disappearing as hyperactive central bankers threaten growth with their anti-inflationary zeal.

To contact the writer of this column: Mark Gilbert in London at magilbert@bloomberg.net
Last Updated: January 4, 2007 04:40 EST
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