MEMORANDUM ITEMS
[Dollar Macro Liquidity +1.5%; Moody's Baa spread 343 bps; bearish]

AM | @GlobalLiquidity

Never disregard the 'Memorandum items' attached to the Fed's balance sheet. The stock of marketable securities held in custody for foreign official and international accounts shows a decline of $9.1bn, which easily outweighs the slight increase in 'Fed credit'. Apples and oranges? As the song says: "Maybe so, maybe no". Before the Lehman crisis, my Global Macro Liquidity indicator was made up of the sum of all bonds owned by central banks (Fed + foreign), with custody holdings acting as a proxy for the dollar as the key international reserve currency.

But then things got nasty, and I had no choice but to incorporate 'Fed credit' as the best proxy for the monetary base. Yesterday's numbers confirm the decline in custody holdings (Treasury + agencies). This item is now growing at a paltry 1.9% y-o-y rate, which suggests that China's current account surplus —the key source of liquidity growth in the 2003-2007 period— is declining fast. Add to the mix the silent and under-reported increase in the Moody's Baa spread (a proxy for corporate earnings) [see], and you end up with an unequivocal sell-the-rallies stance.

[1] Fed credit: $ 2,833.2 bn (+0.9%); [2] Custody holdings: 2,796.2 bn (+3.4%); [3] Agency Holdings: $ 716,8 (-3.2%); [4] Dollar Macro Liquidity: $ 6,346.3 bn (+1,5%); [5] Market Liquidity Index: -25.3%; [6] Spread Moody's Baa: 343 bps (+69bps).
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