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Ritesh Jain: It's the liquidity, Stupid! That's what is causing all the turmoil

Section: Daily Dispatches

By Ritesh Jain
The Times of India, Mumbai
Sunday, December 16, 2018

Nedbank strategists Mehul and Neels write some exciting stuff and, like me, they don't confuse fundamentals with liquidity. They write in a strategy note:

There is a strong relationship between the change in global dollar liquidity (M1) and the performance of the global stock market -- a correlation of 76 percent.

... Dispatch continues below ...


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Global dollar liquidity leads global stock markets by an average of eight months.

-- If there is no boost to global dollar liquidity, we expect this relationship to hold. As a result, the risk of further downside potential for stock markets across the world would remain intact.

-- We believe this is the "canary in a coal mine" for risk assets.

-- U.S. dollar-denominated debt of emerging market corporates has grown from $650 billion in 2009 to the current $3.2 trillion and there are significant mismatches -- U.S. dollar-denominated debt as a percentage of gross domestic product is 70 percent and that of percentage of reserves is 75 percent.

-- Amid a slowdown in global growth, coupled with a tighter global dollar-Liquidity environment, if emerging-market corporate spreads continue to widen, it would negate our view below on emerging-market equities -- that is, that a short-term bounce is possible.

... My two cents

So, it comes down to liquidity -- and the global money supply is not expanding. In fact it is contracting. The Fed is already in quantitative tightening mode. (Forget rate increases, which are only the cost of providing liquidity.) In a widely expected decision, the European Central Bank has also decided to stop its quantitative easing.

So how will existing debt be serviced and how will the new debt be created if the private sector and consumer are already leveraged?

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