WEEKLY FED BALANCE SHEET REVIEW. JUST SWAPPIN' [1]
. Federal Reserve: "Factors Affecting Reserve Balances", March 28

- Fed's Treasuries holdings: $775.6bn (+$2.3bn)
- Other central banks' Treasuries holdings: $1,210.8bn (-$6.6bn) (*)
- Other central banks' agency securities: $668.9bn (+$10.5bn) (*)
- Mackinlay's Global Dollar Liquidity Index: $2,655.4bn (+$6.1bn)
(*) Off-balance-sheet items.

The only remarkable feature of last week's Fed weekly balance sheet is the fact that foreign central banks continue to swap Treasuries for agency securities. A year ago, holdings of agency securities made up 38% of the assets held in custody at the Federal Reserve Bank of New York. Now, they represent ... 55% of the total. Meanwhile, our Global Dollar Liquidity Index grows at a 12.3% annual rate, the fastest pace since August 2005.

Liquidity watchers have their hands full with the incessant flow of articles, essays, indices and innovations. Here's some of the stuff I've been reading lately:

- Bill Gross' April Investment Outlook is out. Always a must-read, Bill Gross writes in his April Outlook that we will soon have to face the consequences of "the 1% Fed Funds financing train of 2003". Pay attention to what lenders —not central banks— do: "It will not be loan losses that threaten future economic growth, however, but the tightening of credit conditions that are in part a result of those losses". Indeed.

- Willem Buiter: A hard landing in China? Prof. Buiter rightly sees China and India as key players in the global liquidity game — more so than G7 central banks: "Both India and China are in the terminal stages of a credit boom. So there will be a cyclical slowdown in both countries. If the monetary and fiscal authorities act in time (they appear to be well behind the curve in both countries) and if they have the right instruments and the political will and freedom to use them (doubtful in both countries) the credit boom can end with a whimper. A hard landing seems more likely, however".

- About the IMF Liquidity Measure. Take a look at page 5 of this report, in which the IMF displays what it calls its "Liquidity Measure". The term "measure" is more appropiate than our own "index", because it deals directly with money and credit figures. The IMF indicator is identical to Merrill Lynch's and closely resembles our own Global Dollar Liquidity Index. The IMF, however, takes the monetary base as a proxy for "domestic" liquidity; we prefer the stock of Treasury securities in the Fed's balance sheet. (We do this is in order not to mix apples and oranges, and also to avoid sharp Y2K-like swings). On last comment: the IMF compares its Liquidity Measure to the VIX index — just as Todd Harrison does.

- PIMCO's Clarida on Petro-Dollars and Credit Spreads. PIMCO's Global Strategic Advisor Richard Clarida argues that a decline in oil prices and a subsequent drain of petro-dollars would cause credit spreads to widen, because "there is evidence to suggest that the petro surpluses have been allocated much more into spread product than have the surpluses of the oil importers [like China]".

agustin_mackinlay@yahoo.com

[1] De nuestro Global Liquidity Blog.