COLUMN-Turning Tide Signals an ebb in the ocean of liquidity: Mike Dolan
(The author is editor-in-chief for finance and markets at Reuters News. All opinions expressed here are his own)
LONDON, April 28 (Reuters) – Is the tide coming down for global asset prices, as the real economic recovery is on the rise?
A maximum of the global currency surge that lifted financial markets amid the first pandemic lockdowns last year may have already been established, and the subsequent liquidity outflow could cause difficulties for assets.
Specialists who follow market liquidity argue that it is not the total amount of money in the system that determines asset prices, but rather the “money surplus”, which is the supply beyond prices. emergency or precautionary liquidity requests.
There are indicators that this excess is declining rapidly, which is why stocks and increased bond yields have lost their zigzag in recent weeks and why inflation anxiety has eased as general rates rise. prices start to rise.
Central bank bond purchases, government cash bailouts and stimulus checks have encountered spikes in household savings and investor cash hoarding last year to quickly prop up all financial boats. after the initial shock of the COVID-19 pandemic.
At least some of the spillover trickled down to stock markets, with global stock prices nearly doubling to record highs from last March’s nadir and still some 20% above pre-pandemic highs as a rebound in activity begins.
But the situation has become muddled, with stock prices failing near record highs.
The pace of asset purchases by G4 central banks has certainly slowed – even temporarily in some cases. Combined with fears of inflation, this distorted bonds at the end of the first quarter, overturning the “cheap borrowing forever” discourse.
But even that bond movement had flattened out, with anecdotal evidence suggesting we may be back to square one.
Monthly surveys of Bank of America fund managers show that last year’s initial jump in the average percentage of cash holdings from around two points to 10-year highs close to 6% has already been fully unwound and s ‘has stabilized at pre-pandemic levels of around 4%.
However, total cash held in U.S. money market funds remains around $ 800 billion above levels at the start of 2020 – even though it is still around $ 300 billion from year highs. last.
Liquidity analyst Cross Border Capital says its index of domestic liquidity conditions in the United States has already passed its peak and the percentage of central banks with loose monetary policies fell to 82% in March from 88% in January .
JPMorgan’s cash flow and liquidity team attempted to clear the picture by re-examining three key indicators of the “excess money supply” that has survived the crisis.
The first occurs when the global money supply increases relative to income and expenditure, or as a ratio of nominal global economic output. He says that gauge, which rose from 1.15 to around 1.4, peaked in January and will continue to decline as GDP grows.
His second compares the rise in global money supply against the aggregate stock of stocks and bonds held by investors other than those held by banks for regulatory purposes.
JPMorgan concludes that this “excess” has completely evaporated, with last year’s jump in that ratio reversing in part due to an expansion in newly issued public stocks and a new scramble for listings.
The last factor is arguably the most debatable and concerns the extent to which people hold cash for precautionary reasons and not for immediate spending or investment.
To do this, JPMorgan has a precautionary cash demand model based on “economic policy uncertainty” indices that rely heavily on key words in news coverage.
As these global and US uncertainty indices have returned to pre-pandemic levels, following the US election and the arrival of COVID-19 vaccines, money supply has exploded against these indicators of demand for change.
However, JPMorgan believes that even the level of excess money is also on the rise as indices of uncertainty have likely fallen to the extent that they are likely to go just as nominal money supply falls, GDP grows and l universe of stocks is increasing.
“All three methodologies point in the same direction, that the excess money supply or excess liquidity has probably peaked.”
Changes in the course of the virus and in the effectiveness of vaccines could of course change many of these assumptions about a transparent recovery to come – as will expectations about the gradual slowdown in central bank money printing. later this year.
New factors beyond the pandemic – such as geopolitical tensions, political crashes, corporate or bank surprises – could also change the dial again.
But if the sometimes peculiar soaring of the markets during the worst economic shock of a generation was indeed based on this view of excess currency, then stock prices could well surprise upside down during what should be a recovery. record to come.
by Mike Dolan, Twitter: @reutersMikeD. Additional cards from Ritvik Carvalho, Thyagu Adinarayan and courtesy of JPMorgan; Edited by Alexander Smith