Liquidity rising

My apologies for last week's newsletter, in which my editorial was reprinted from the prior week. Perhaps it is age-related sentimentality, but the intern responsible was merely beaten with a bamboo rod.

The liquidity cycle has come to prominence in the past three or four years in no small part thanks to the work of Cross Border Capital's CEO and Managing Director Michael Howell. His system, informed by his work as Research Director at Salomon Brothers from '86 to '92, provides a more comprehensive view of global liquidity than those merely based on money circulating in the general economy (e.g., M1 or M2). Howell asserts that the majority of liquidity is in financial and asset markets, which makes sense considering measurements like M2 do not include sovereign bonds, banks reserves, and other forms of credit.

All of this to say, global liquidity is rising. Howell's model describes a four-year cycle that we are currently in the rising phase. For skeptics, there is no stronger evidence that global liquidity is rising than the Fed cutting 50 basis points on September 15. Seven days after Powell effectively announced the beginning of a U.S. easing cycle, China's central bank introduced its most aggressive stimulus package in four years. This should be a boon for Bitcoin and crypto as one of the most liquidity sensitive assets, if not the most sensitive (the last 1.5 sentences were lifted directly from last week's unread editorial).

China's move caused many to ask, "why now?" Why did China wait so long to revive the country's struggling economy which is expected to miss its 5% 2024 growth target? Weston Nakamura of Across the Spread pointed out the obvious, China had to wait for the Fed to begin an easing cycle before it could too, due to fears of exacerbating the ongoing currency risks of yuan depreciation and further capital outflows.

China's move is a strong indicator that other countries will likely follow suit, sooner rather than later. If the size of China's initial response is an omen of the liquidity deluge to come, it's probably best to pay no mind to this week's price action. Steady as she goes.

-David Sencil

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