Pimco co-head Mohamed El-Erian and Paul McCulley, have stressed the concept of “endogenous liquidity”, the extent to which the market itself expands and contracts liquidity. His is one of the most important themes or issues facing the markets in 2008. We have seen the contract of the ABS commercial paper market which has eliminated liquidity in the sub-prime mortgage market. The credit crunch is also reducing leveraged deals that need some form of bond insurance or a specific rating. We are seeing the unwinding of carry trades in currency markets. There has also been an unwinding of some equity trading in emerging markets countries. The key to 2008 performance will be finding those markets which are most sensitive to global liquidity and tracking the ebbs and flows to endogenous liquidity.
http://news.yahoo.com/s/ft/20080116/bs_ft/fto011620081518200460
Barclay’s bank has been developing the theme of stagflation –lite, the combination of growth below trend and inflation above target. This description of the current environment has made me rethink the definition of stagflation. Instead of expecting very high inflation with recessionary growth, stagflation-lite tempers the idea and looks at more moderate combination of growth and inflation as a description. The key issue for forecasting is determining how monetary authorities will react to the trade-off between growth and inflation. We have seen most central banks focus on inflation targeting, so a new environment of low growth and inflation will cause some central banks to rethink their behavior.
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