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Strategies & Market Trends : Currencies and the Global Capital Markets -- Ignore unavailable to you. Want to Upgrade?

To: Chip McVickar who wrote (1386)	3/15/1999 10:21:00 AM
From: Henry Volquardsen	Read Replies (1) \| Respond to of 3536

Chip, Let me start by saying I have followed Martin Armstrong's work for about 20 years. He is very bright and has some excellent insights into the markets. I absolutely agree with what he said about Europe, EMU and the Euro. I have some minor differences with his comments re: Japan but am basically in agreement. And as you point out, I agree that that liquidity and free capital controls are a vital condition for healthy markets. I will disagree, however, with his comments about liquidity. First he talks of the liquidity contraction in relation to the Russian crisis. That is correct there was severe liquidity disruptions. But I feel his statement But the collapse of Russia sparked a contraction in emerging market investment that then sent interest rates going nuts even within the primary markets of Europe. This trend destabilized the derivative market and caused the collapse of the cash Interbank market as well. is misleading. The juxtaposition of these two statements gives the impression, to me at least, that he is saying the collapse in Russia led to a collapse of the cash interbank markets in the primary European market. I disagree. Yes there were disruptions in emerging markets and in certain sectors of the developed markets. But the the developed markets were far from collapse. Liquidity crisises are not uncommon in developing markets, that is why they are still developing. Another statement I have a problem with is However, the Euro introduced a fixed rate system between the 11 nations within EMU. This effectively closed down trading even further, which contributed to the shrinking of liquidity. This is frankly nonsense. Liquidity is not equated to trading volume. Liquidity would have decreased only if the currency stock decreased. Since the new Euros created were of equal value to the old currency there has been no net reduction of liquidity. The fact that interbank traders are not trading lire for franks anymore says nothing about liquidity. Liquidity is not even a question of the total value of currency outstanding or the volume of transactional items. It is a question of freedom of movement and willingness to invest. The willingness to invest question is one best measured by looking at credit spreads and related indicators. Since the Russian debt/Long Term Capital problems of last year credit spreads have been narrowing considerably. This indicates to be that willingness to take risk has improved considerably and that the current liquidity conditions are pretty good. So I have some technical disagreements with Mr Armstrong about current market conditions. Questions about the fate of the bull market are complex. Martin correctly points to liquidity being a vital factor. But last year he wrote an excellent piece which showed how in terms of global market turmoil liquidity would tend to gravitate towards the US. In addition the liquidity powering the US equity markets have a powerful domestic demographic component. Ten years ago a number of people were forecasting an explosion in US equity markets as baby boomers got serious about saving for retirement. In retrospect this has clearly been a major factor in the rise in US equity markets. And all the models of saving habits etc point to this wave increasing. Don't get me wrong, I find the current level of equity valuation a concern. But the liquidity picture at the moment appears positive. I will grant, however, that liquidity conditions can change overnight.