Liquidity to ward off the bears in 2018?
The growling of bears seems to be growing louder, despite the fact that markets have so far been remarkably calm in the face of unsettling political news on a range of fronts. I very much doubt we have seen the end of history, as Francis Fukuyama’s celebrated 1992 book postulated when liberal democracy seemed to win over all other political systems, but we have to ask why the bears have been wrong so far.
The latest piece from our colleagues at CrossBorder starts off: ‘Does Global Liquidity Warn of a Bear Market in 2018?’ From a liquidity perspective, the answer is pretty clearly ‘no’. At the end of November, global liquidity stood at 48, just below neutral. They argue that the world is focusing too much on Developed Market central banks withdrawing liquidity and not sufficiently on what is going on in Emerging Markets, where liquidity is loose and the sums are - surprising though it may be - significantly larger. The implication is that what’s going on in China, in particular, will be sufficient, at least for the time being, to stop the world catching a cold if America sneezes.
In their experience, sharp and accelerating falls in cross border flows are also a valuable signpost to an impending market crisis. The aggregate today stands at 58 (scale 0-100), compared to 88 six months ago but the trend is not speeding up, which should give investors some reassurance.
We see the US as late in its economic cycle, Europe as mid-cycle, and China and the Asian bloc as early cycle. It can be seen most clearly in private sector liquidity flows, where Europe is strongest at 88 and the US weakest at 34. This underpins our view that when economic trouble comes it is most likely to come out of the US. But, unless history reasserts itself through a geo-political jolt, probably not in 2018. We would advise investors to watch the upswing in China just as much as the downturn in the US.
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