2 WORDS ********************EXCESS LIQUIDITY***************** Merrill sounds alarm on global liquidity By Ambrose Evans-Pritchard, International Business Editor Last Updated: 1:22am GMT 06/02/2007 Tom Stevenson: Investment column Merrill Lynch has warned of a global credit crunch as central banks in Europe and Asia tighten monetary policy, advising clients to shun risk and switch to safer assets over the forthcoming months. Presenting its strategy for 2007, the US bank said the world boom is clearly giving way to a slowdown that will shake up markets and punish smaller equities, industrial metals, and lower-tier assets of almost every kind. Money can still be made as the cycle turns, chiefly by rotating into short-term cash deposits and quality stocks with good dividend yields such as AstraZeneca, Barratt Developments, Sweden's retailer H&M, or Spain's Banco Popular Espanol - along with a few bars of gold bullion. The bank said 2007 would be the "year of the dividend", with fear returning as the VIX and VDAX volatility indexes - widely used in option trading - rise from record lows. "We think global interest rates are going to rise a lot more than investors are discounting, and this is a worrisome outlook for profits," said Khuram Chaudhry, chief European strategist. "We've seen liquidity everywhere, in equities, property, bonds. It's been a one-way bet for investors, and they've taken on a lot of risk. But they're not looking beyond the news to the slow drip-drip effect of interest rates. It matters when central banks tighten monetary policy," he said. advertisementThe US Federal Reserve has raised interest rates 17 times already since June 2004 from 1pc to 5.25pc, but Europe has been slower and the Bank of Japan is still holding rates at 0.25pc - offering hedge funds an alternative window of easy money. This last window is about to close, albeit slowly. Global liquidity - the monetary juice that fuels the system - reached a peak growth rate of 22pc at the end of 2005, even higher than the 15pc peak just before the dotcom bust in 2001. The rate has since plummeted to around 10pc, and may have further to go. Mr Chaudhry said the suddenness of the fall matters more than the absolute level, typically serving as a warning signal with a lead time of 12 to 18 months. It slid in a similar fashion in 2000, and before both the 1998 Asia crisis and the US Savings and Loan crisis in the 1980s. Merrill Lynch said it was cutting back on British equities, viewed as too exposed to resource, energy, and mining stocks that have already seen the best of the cycle. Britain is now one of the most heavily indebted countries in the world, leaving little scope for equity growth. Total loans amount to 162pc of GDP, compared with 111pc in the US and just 27pc in Poland. "The UK is going to struggle," said Mr Chaudhry. Merrill Lynch is betting on banks in Eastern Europe, a "trend growth" story for the medium to long-term with plenty of staying power as credit use catches up with the West. For those willing to dabble in Chinese equities, it suggests a switch from exporters to companies that serve local consumers as China's urban youth - Generation Y - catch the bug for western lifestyles. If in doubt, opt for the Chinese banks. They will fund the consumer revolution. Ultimately, no country is immune to a liquidity crunch if central banks tighten too far, as they often do. "We can debate whether it's going to be a soft landing or a hard landing, but the bottom line is that we face a landing," said Mr Chaudhry.
Interesting article. I would never imagine GB have a higher percentage of debt than the US. Especially since the GBP is so much more valuable that USD.
yeah - its surprising. i ahve read reports that a lot of big banks expect gbp to correct by 15-20% . looking at the chart though it looks like its ready to take out 2 soon
You dont need central banks to suck up liquitity by rising interest rates. When asset prices fall, loans on those assets will fall. Stocks and property will fall, thus the monies lent on these assets will fall. Savings will go into debt reduction not spending. That will be your credit crunch !
They are following the lead of the European meeting on the subject. I think some major players wants to pick up some key assets for cheap.
i dont see a liquidity crush whatsoever. the us, uk, australia are already at the top of hike cycle, while europe is in between and only japan is in the beginning of the cycle. so even we have rampant inflation in in europe and japan which is quite unlikely, the chances are that us and uk start easing pretty soon which will compensate the rest of hikes in the other areas (from a global liquidity perspective, that is). china is whole different ball game though. they are experiencing the biggest transformation in centuries and they are still extremely vulnerable to external shocks. china is already overheated and that's mostly because they are trying to suck up world's liquidity at expense of low wages and dumping prices. until the chinese authorities dont let their currency float freely, this major imbalance will continue to exert pressure in the global system. no one knows for sure what are the long term implications of this status quo but, in the past, similar situations always led to major turmoil. the effect on global liquidity will depend on how gently china fits itself in the rest of system and how is that accomplished.
I know about 1.5 years ago when Indian stock markets SEnsex was at 6600 the Merrill had a very big report out as to why Indian markets are overvalued and should fall to 4500 range. Well Markets have shot to 14500. I guess they were wrong by just 10000 points . GOD bless Merrill, Rajiv
2 things: 1) Central bank interest rates are far from the main tools used for liquidity and money supply. They are just the most publicized. 2) The real inflations rates, those not massaged by government statistics are quite serious. That includes UK, US and Australia. The average person on the street cannot go argue lower prices for vital goods based on what the "Report" says. That's the real concern. That's why the major European nation bank delegates had a meeting. It's getting tougher and tougher to conceal the real situation.
i kind of sympathize with that. i live in euro land and there is a strange feeling prices have doubled since the euro was adopted while inflation reports didnt acknowledge it. but those are consumer perceptions and most often doesnt reflect the overall inflation picture within the economy. i dont see a reason central banks should act upon consumer perceptions rather than on credible economic reports. most people fail to understand that the bulk of the economy is now service based and those have prices that in many circumstances have been falling since the 2000 dotcom meltdown. as a result, the price index has been able to accommodate the commodity shock and still show a healthy trend across the board. most probably now that commodity prices are reverting to their mean, the problem will be to accommodate china imbalances without major adjustments in the world economies.