2012 Data
Global Liquidity Indexes (GLI)
Accurate and prescient investment data
CrossBorder Capital Ltd
96 Baker Street
London, W1U 6TJ
1
Tel (44) 20 7908 2800
www.liquidity.com
The Global Liquidity Cycle
100
Loose
Asset Market Boom
US Fiscal
Spending
Boom
Inflationary
Boom
80
Soaring
Commodities
Surging
Dollar
Reagan
Election
60
40
80
60
Barings
Collapse
Russian
Crisis
Crisis
Penn Central
US Credit
Bankrupt
Squeeze
US
Commercial
Sterling Crisis
Paper Crisis
40
9/11
Plaza Accord
Mexico
Peso
Crisis
Johnson
Matthey
End Of
Bretton UK Banking
Crisis
Woods
Real Estate /
Commodities
Boom
Japanese
Bubble
Louvre
Accord
20
US Bank
Risk On
Bond
B
d Asian
Crash Crisis
WeakUS$
OPEC II
Tech/
Y2K
Emerging Market
Boom
1987 Crash
OPEC I
Tight
100
Gold
Stock Market
Boom
Failure of
Continental
Illinois
LDC Debt Crisis
Volcker Fed
US Sub-prime
Crisis
/GSEs/AIG
Bailout/
Northern Rock/
Bear Stearns/
Lehman
Failure/UK
Banks
'Nationalisation'
Enron/
Worldcom
Scandinavian
Banking Crisis
Argentina
Crisis
US S&L
Crisis
Japanese
Tightening
0
65
67
69
71
73
20
0
75
77
79
81
83
85
87
89
91
93
Banking Crisis
2
95
97
99
01
03
05
07
09
11
Risk Off
Global Liquidity Indexes (GLI) are comprehensive
“... CrossBorder Capital provides the
monthly surveys of carefully selected financial
most comprehensive and most
considered evaluation of Global
variables compiled by CrossBorder Capital. They
Liquidity available anywhere”
provide an advance indicator of ‘financial
financial stress’
stress ,
and of what will happen to financial markets and
“There is a vast pool of liquidity,
the real economy by tracking data on credit
much of it borrowed, under-pinning
share prices and ready to move in
spreads, available funding, cross-border flows and
on any setback. Only when the
credit markets are disrupted
p
... is the
buying power undermined. The
investment fundamentals now play
Central Bank interventions across some 80
countries worldwide.
little role …”
CrossBorder Capital’s Liquidity Indexes are
regularly available within 10 working days of each
Financial Times
month
h end,
d and
d typically
i ll llead
d fifinancial
i l markets
k
and
d
economies by between 6 – 12 months. These
Indexes have been continuously refined and
developed since their inception in the early 1980s.
Asset Market Boom
100
Loose
US Fiscal
Spending
Boom
80
100
Stock Market
Boom
Inflationary
Surging
Boom
Dollar
Soaring
Commodities
OPEC I
Gold
WeakUS$
OPEC II
Reagan
Election
60
Plaza Accord
20
US Bank
End Of
BrettonUK Banking
Woods Crisis
Crisis
US Credit Penn Central
Squeeze Bankrupt
US Commercial
Sterling Crisis
Paper Crisis
Tight
0
80
BondAsian
Crash
Crisis
Japanese
Bubble
Louvre
Accord
40
Tech/ Real Estate /
Y2K Commodities
Boom
1987 Crash Emerging Market
Boom
Johnson
Matthey
Risk On
60
Russian
Barings Crisis
Collapse
Mexico
Peso
Crisis
Scandinavian
Failure of
Banking Crisis
Continental
US S&L
Illinois
LDC Debt Crisis
Crisis
Japanese
Volcker Fed
Tightening
40
9/11
Enron/
Worldcom
Argentina
Crisis
US Sub-prime
Crisis
/GSEs/AIG
Bailout/
Northern Rock/
Bear Stearns/
Lehman
Failure/UK
Banks
'Nationalisation'
65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
Banking Crisis
3
20
Risk Off
0
“…with respect to crises, the
results of our analysis are clear:
credit matters, not money …
financial crises throughout history
can be viewed as ‘credit booms
gone wrong’ … [and] past growth
of credit emerges as the single
best predictor of future financial
instability…”
Schularick, M and Taylor, A,
in Credit Booms Gone Bust,,
NBER Working Paper,
November 2009
Liquidity Index Methodology
•
CrossBorder Capital’s Global Liquidity Cycle and
its national and regional sub-indexes define
fluctuations in both the quantity and quality of
money. It is a leading and predictive component
of the broader financial and economic cycles that
are marked by asset price swings, movements in
interest rates and changes in the tempo of
Citibank Major Economies 'Economic
Economic Surprise'
Surprise Index:
Actual and Forecast Using Global Liquidity (Lagged)
b i
business
activity.
ti it
80
CrossBorder Capital’s liquidity data is available
for all major developed and emerging markets
Worldwide in monthly, index form and has a near-
60
40
20
0
forty year history.
history
-20
-40
•
‘Liquidity’ is a consistent quantitative measure of
‘funding sources’ taken from national flow of
funds accounts and using a standardised IMFtemplate: it is a far broader measure than money
and a far better measure than interest rates.
Liquidity consists of all cash and credit available
to financial markets, once the immediate
transactions needs of the real economy have
been fulfilled.
2003M0
03
2003M0
08
2004M0
01
2004M0
06
2004M11
2005M0
04
2005M0
09
2006M0
02
2006M0
07
2006M12
2007M0
05
2007M10
2008M0
03
2008M0
08
2009M0
01
2009M0
06
2009M11
2010M0
04
2010M0
09
2011M0
02
2011M0
07
2011M12
•
-60
-80
-100
-120
Forecast
A t l
Actual
UK Business Cycle and Liquidity
100
40
20
80
0
60
-20
•
40
Liquidity (flow of funds) data gives an alternative
and often different view to traditional National
Accounts and business surveys.
-40
20
0
-60
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13
Li idit IIndex
Liquidity
d (Ad
(Advanced
d6
6m; LHS)
CBI Business Confidence
(Percentage; RHS)
4
-80
Liquidity Index Methodology
These indexes are Diffusion indexes.
1.
Policy Liquidity PLI (Central Bank
Money)

measures the size and composition of the
They are calculated as ‘normalised’
normalised zz
scores for each variable. These indexes
Central Bank balance sheet, net of ownname bill issuance and Government
deposits, and with an emphasis on
transactions with the financial sector
vary between 0 and 100 with levels of 50
indicating ‘neutral’ relative to a 3-year
average. Sub-components are equalvariance weighted.
2.
Bank Liquidity BLI (Private Sector
Assets)

measures of funding from savings
deposits and from wholesale markets
markets.
These lead loan advances, which, in turn,
lead traditional money supply measures
as a result.
greater the implied rate of change.
change
3
3.
Cross-border Flows XFI (Foreign
Liquidity)
Multidimensional measurement of liquidity

all financial flows, but excluding FDI
4.
Financial Conditions FCI (Credit
Readings above 50 signal an
improvement or increase against trend.
Readings below 50 signal a deterioration
or decrease compared to trend.
The greater the divergence from 50, the
and broad coverage adds to accuracy and
conviction, and eliminates ‘false’ signals.
Spreads Cross-Check)
Each country’s Liquidity Index comprises

four sub-indexes. Each sub-index itself is
built up of around 8–10 underlying data
series. We publish sub-indexes for :-
This latter sub-index differs from the other
three which solely comprise quantity
data. The credit spread sub index is
included as a ‘cross-check’ and carries a
smaller weight in the overall index as a
result
5
Why Liquidity and not Money?

‘Money’ is too narrow. It comprises Bank Deposits.

‘Liquidity’
Liquidity includes money and credit and measures ‘funding’
funding .

USM2 (‘Money’) is US$8trillion. US ‘Liquidity’ is US$22trillion or 2¾ times bigger
Funding Liquidity
Money Market
Mutual Funds
Household &
Corporate Savings
S
Securitization
iti ti
< 3m
Bank Deposits
TOTAL
QU
LIQUIDITY
Money & Capital
Markets
Cross-border Flows
Policy Liquidity
Securitization
> 3m
6
Coverage
Global
Emerging
Argentina
Indonesia
Portugal
Australia
Ireland
Qatar
Austria
Israel
Romania
Bangladesh
Italy
Russia
Belgium
Japan
Saudi Arabia
B
Brazil
il
J d
Jordan
S bi
Serbia
Bulgaria
Kazakhstan
Singapore
Canada
Kenya
Slovenia
Chile
Korea
South Africa
China
Kuwait
Spain
Colombia
Lithuania
Sri Lanka
Croatia
Malaysia
Sweden
Czech
Mauritius
Switzerland
Denmark
Mexico
Taiwan
Egypt
Morocco
Thailand
Estonia
Netherlands
Turkey
Finland
New Zealand
UAE
France
Nigeria
Ukraine
Germany
Norway
UK
Greece
Pakistan
US
Hong Kong
Peru
Venezuela
Hungary
Philippines
Vietnam
India
Poland
Zimbabwe
Argentina
Jordan
Romania
Bangladesh
g
Kazakhstan
Russia
Brazil
Kenya
Saudi Arabia
Bulgaria
Korea
Serbia
Chile
Kuwait
Singapore
China
Lithuania
Slovenia
Colombia
Malaysia
South Africa
Croatia
Mauritius
Sri Lanka
Czech
Mexico
Taiwan
Egypt
Morocco
Thailand
Estonia
Nigeria
Turkey
Greece
Pakistan
UAE
Hong Kong
Peru
Ukraine
g y
Hungary
Philippines
pp
Venezuela
India
Poland
Vietnam
Indonesia
Portugal
Zimbabwe
Israel
Qatar
7
Coverage
Eurozone
Emerging
Asia
Latin
America
EMEA
Frontier
Austria
Germany
Netherlands
Belgium
Greece
Portugal
Finland
Ireland
Spain
France
Italyy
Bangladesh
Korea
Sri Lanka
China
Malaysia
Taiwan
Hong Kong
Pakistan
Thailand
India
Philippines
Vietnam
Indonesia
Singapore
Argentina
Colombia
Brazil
Mexico
Chile
Peru
Bulgaria
Kenya
Russia
Croatia
Kuwait
Saudi Arabia
Czech
Lithuania
Serbia
Egypt
Mauritius
Slovenia
Estonia
Morocco
South Africa
Hungary
Nigeria
Turkey
Israel
Poland
UAE
Jordan
Qatar
Ukraine
Kazakhstan
Romania
Zimbabwe
Argentina
Kuwait
Serbia
Bangladesh
Lithuania
Slovenia
Bulgaria
Mauritius
Sri Lanka
Croatia
Nigeria
UAE
Estonia
Pakistan
Ukraine
Jordan
Qatar
Vietnam
Kazakhstan
Romania
Kenya
Saudi Arabia
8
Venezuela
Aggregate Liquidity Index - World
Policy Liquidity PLI
(Central Bank Money : Index, 40% weight)
100
Bank Liquidity BLI
(Private Sector Assets : Index, 40% weight)
100
100
100
80
80
80
80
60
60
60
60
40
40
40
40
20
20
20
20
0
0
0
7576777879808182838485868788899091929394959697989900010203040506070809101112
100
7576777879808182838485868788899091929394959697989900010203040506070809101112
Domestic Liquidity
Cross-border Flows XFI
(Index, 80% weight)
(Foreign Liquidity : Index, 20% Weight)
100
100
0
100
80
80
80
80
60
60
60
60
40
40
40
40
20
20
20
20
0
7576777879808182838485868788899091929394959697989900010203040506070809101112
0
0
7576777879808182838485868788899091929394959697989900010203040506070809101112
Financial Conditions FCI
(Credit Spreads Cross-check: : Index, 20% weight)
0
Overall Liquidity Index
100
100
100
80
80
80
80
60
60
60
60
40
40
40
40
20
20
20
20
100
0
7576777879808182838485868788899091929394959697989900010203040506070809101112
0
0
9
7576777879808182838485868788899091929394959697989900010203040506070809101112
0
Frequently Asked Questions
Q: Even if liquidity is
A: Paradoxically, the opposite is true. The
important and, in theory, can
emerging economies typically have timely and
be forecast, latest data may be
high quality monetary data. This is because
hard to get and many
many have become large international borrowers
countries, especially the
and bankers often judge them on their overall
emerging economies, are
monetary discipline. Global monetary data, in
likely to have flaky statistics
statistics.
general are of good quality
general,
quality, being collected and
regularly audited by the IMF. These monetary
data are more widely available and more timely
than conventional National Income Accounts
p and
data. Moreover, it is full data, not sample,
consequently less frequently revised. We monitor
and contact around 80 central banks each
month, and collect over 2,000 separate data
items from them in order to compile our liquidity
indexes. What's more, unlike earnings
definitions, the goal posts do not shift because all
participants adopt standard IMF definitions.
Therefore, using this alternative data standard
we can devise a valuation framework for global
financial markets.
10
Frequently Asked Questions
Q: What liquidity data does
A:
CrossBorder Capital provide?
Central Bankers are often economical with the truth
and sometimes duplicitous in their statements.
Consequently we prefer to ‘watch
Consequently,
watch their hands’
hands
rather than ‘read their lips’. Monetary actions speak
louder than words. These actions are monitored
through a series of proprietary liquidity indexes that
we calculate for national economies, for economic
regions
g
and for the world overall. These aggregates
gg g
are size-weighted. Each liquidity index consists of
four sub-components:
1)
2)
3)
4)
Policy Liquidity PLI - a primary measure of the
quantity-dimension of Central Bank monetary policy,
i.e. liquidity injections;
Bank Liquidity BLI - a secondary measure based
on private-sector 'free' (after necessary capital
spending) savings, i.e. (a) surplus cash thrown-off by
the corporate sector; (b) held in the banking system,
and
d ((c)) saved
db
by th
the h
household
h ld sector.
t E
Extra
t cash
h
can be derived from economic slowdown; greater
economic efficiency; decreased capital expenditure,
and changes in the credit policy of commercial
banks and OFIs.
Financial Conditions FCI - a "cross-check"
cross-check index
consisting of a basket of very short- term credit
spreads.
Cross-border Flows XFI - a monthly measure of
cross-border activity, comprising all financial flows,
g transactions. It is also
i.e. bonds,, stocks and banking
calculated net, i.e. foreigners' net purchases less
domestic investors' net foreign buying.
11
Frequently Asked Questions
Each of these indexes aims to give an
What's more, it is non-linear. Thus, if all
unambiguous measure of funding liquidity
sub components have 'high'
sub-components
high z-scores,
z scores the
conditions that is consistent with the flow of
aggregate z-score will be much higher
funds identity, but one that also recognises
because it works from joint probabilities.
and avoids data problems, i.e.
Each z-score is expressed as a 'normal'
measurement, timing and structural
index range 0%-100%, with its mean set at
change.
50%; 1sd drawn at 60% and 2sd at 80% (1sd 40%, -2sd 20%).
We build our liquidity indexes and subindexes on 3 levels - (a) main variable; (b)
Our analysis puts most emphasis on
available components, and (c) confirming
quantity (80% weight) measures rather
correlated variables. Each data series is
than the short-term credit spread (20%
first 'normalised' to give a z-score. These
weight) measure of liquidity. The latter term
sub-components are next combined into an
largely indicates qualitative changes in the
aggregate, weighted index. The specific
access to credit, i.e. wide credit spreads
weights and the choice of variables to
could suggest that money is only available
include represent our proprietary
to a specific fringe of borrowers. The
knowledge. This second index is then re-
quantity measures show how much money
normalised
li d again
i tto ensure a consistent
i t t z-
i generall iis circulating
in
i l ti within
ithi th
the fifinancial
i l
score at the aggregate level.
sector. In short, we stress the importance
of money not interest rates, and we focus
on a strict financial definition of money.
The resulting aggregate Z-score is not a
simple sum of components, but it
incorporates a 'confidence' effect.
12
Frequently Asked Questions
Q: Does Liquidity include the
A: Where appropriate it does. Not surprisingly both
activities of so-called 'Shadow
categories are most important in the US, and of some
B k ' and
Banks'
dd
derivatives?
i ti
?
importance in Europe
Europe. Essentially
Essentially, the shadow banks
cover all sources of credit that are not supplied by the
traditional banks. They include: (1) commercial paper
issuance; (2) lending by mortgage banks and government
agencies, e.g. Fannie Mae and Freddie Mac; (3)
securitisation; (4) credit cards, hire purchase and other
forms of consumer finance; (5) derivatives, but only
where the transaction increases credit.
As an example, our US liquidity measures stand at
around US$24-25 trillion, compared to some US$8-9
trillion for traditional money supply and measures of
conventional bank credit. In short, our data pool is some
two-to-three times bigger.
Some analysts try to include full data on derivatives that
often runs into hundreds of trillions. This is bogus. First,
as we noted earlier, not all derivative transactions create
credit; many (indeed the vast bulk) simply reshuffle risk.
Second, the wilder estimates of the value of derivatives
grossly exaggerate the true exposure, or leverage. For
example, an interest rate swap that exchanges a fixed
interest stream of
of, say
say, 5% for another floating rate
stream currently struck at 6%, will each be valued at par,
i.e. at $200 rather than $1.
13
Frequently Asked Questions
A: Compared to most economic series, liquidity is a
Q: Do your liquidity estimates
relatively stable series. However, there are
suffer major revisions?
revisions.
i i
Th
The b
bulk
lk off th
these occur within
ithi th
the fifirstt
month following release. This is because of the
nature of the estimation process. To maximise time
sensitivity we produce a 'flash' estimate of liquidity
g y 10 days
y after the end of the month in
roughly
question. This 'flash' figure contains around twothirds of the full data sample for each country plus
extrapolated numbers for the other components.
The first 'full' estimate is available some two-to-three
weeks later. The table shows the average
percentage differences in absolute terms (i.e.
without regard to sign) between the 'flash', 'full' and
'final' estimates. See Figure below.
100
"Flash" to
"Full" to
Total
"Full"
"Final"
Revision
80
90
4.3
0.6
4.9
70
5
0.9
5.9
60
Japan
6.2
1.1
7.3
UK
6.1
0.8
6.9
Eurozone
6.4
1
6.5
20
Emerging Markets
3.6
0.8
4.4
10
Global
USA
50
40
30
0
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Flash
14
Final
Frequently Asked Questions
Q: How can we access the
Liquidity data?
A: Our liquidity data can be accessed via our
proprietary
p
p
y Excel add-in. This enables yyou to
download all the series described earlier in this
document for all the countries and regions in our
coverage. The data largely begin from 1980 and
are monthly observations. The add-in allows you to
download data, save reports so that you can
access your chosen dataset easily, and manipulate
and plot data.
15
About CrossBorder Capital
CrossBorder Capital is a leading global financial information provider.
The Company provides independent research to aid asset allocation and decision
making.
Its client base includes the key institutional participants in financial markets.
More Information
For more information on the products and services from CrossBorder Capital, please
contact us:
CrossBorder Capital
96 Baker Street
London W1U 6TJ
Tel: 00 44 207 908 2800
Fax: 00 44 207 908 2835
E-mail: crossbordercapital@liquidity.com