Posts tagged money supply
Slipping and Sliding

Unfortunately, the stand-out move in markets since my last report—the crash in oil prices—is one on which I have little to say, let alone expertise. I didn’t see it coming, and I am not exactly sure why it happened. That said, I am not here to make excuses, so I’ll try to connect the dots as well as I can. A sudden fear of over-supply due to a shift in OPEC policy doesn’t seem to cut it as an explanation. I am more inclined to buy the idea of linking it with the jump natural gas prices, deeming it an erstwhile winning spread-trade gone wrong, at least in part. Pierre Andurand’s name has been mentioned too, which certifies that this has been a real rout in the oil market. Mr. Andurand’s $1B commodities fund reportedly shed a cool 20.9% last month.  Whatever the causes of the swoon in oil, it serves as a decent entry the broader market discourse. I am sympathetic to the argument by Cameron Crise, a strategist with Bloomberg, that “Recent energy-price mayhem is just the latest sign that something about these markets looks broken.” Cameron goes on: “The presumption of a continuous liquidity spectrum is clearly an errant one.” Most readers of these pages will have plenty of recent examples that fit this picture, so I’ll jump straight to the grand conclusion.

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A Great Story

We will probably spend a big part of Q4 deciphering the economic data through the murky looking-glass of U.S. hurricanes and Asian typhoons, so just to be clear. I am still not happy with the trajectory of global leading indicators. Narrow money growth has collapsed, and recent data suggest that the slowdown will worsen in Q3. M1 in China rose 3.9% year-over-year in August, the slowest pace since the middle of 2015, and the trend in the U.S. and Europe also is poor. In the U.S., M1 is growing just under four percent on the year, the weakest since 2008, and the EZ headline also has slowed, though it is robust overall. The crunch in narrow money chimes with central bank balance sheet data. My home-cooked broad index, which includes the SNB and Chinese FX reserves, is now falling on a six-month basis. These data don’t mean the same in all economies—M1 is not a good LEI in the U.S. for example—and the Chinese numbers will turn up soon to reflect recent efforts to ease financial conditions. That said, a slowdown in US dollar liquidity matters for non-US markets, and the Chinese M1 numbers lead by six-to-nine months. The overall story is clear: Global liquidity growth has slowed to a trickle, warning about risks of growth and asset prices.

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Focus on the obvious

The market always tries to distract investors from what the obvious themes, a bit like a good striker selling a dummy to a goalkeeper, before he tugs it away. I’ll try my best to avoid that mistake here. Seen from my desk, the state of play in the global economy currently can be boiled down to two stories: First, the intensifying slowdown in real narrow growth in the major economies, and second, the fact that monetary policy divergence between the Fed and the rest of the world is being stretched to hitherto unseen extremes. This doesn’t mean that other stories—EM wobbles, Italian bond market woes, and trade wars—aren’t important. They are, especially for macro traders who have deservedly re-gained their mojo this year. But no matter how much joy investors have in the murky world on emerging market currencies, they will, sooner or later, have to take a view on the two themes highlighted above. Using money supply as part of global business cycle analysis is a controversial topic. For some analysts, it is the holy grail, while others will walk out of the room if you even mention it. Many economists prefer the credit impulse—the second derivative of loan growth—but if you actually draw the charts, you will find that this indicator very often is closely aligned with M1 growth.

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