RJH writes...

Before global equity markets lifted off circa 1984, it was the US monetary base, with a near two thirds share of total liquidity, that counted. Today the difference is startling: global liquidity has increased almost ten times; and since 1994 foreign official assets have usually dominated - their share today stands at 58%.

(Click for larger image) Exhibit 1: % shares of US and foreign official liquidity & total liquidity $bn, 1970 - 2006

Compared to the US monetary base, foreign official assets punch above their weight in terms of volatility (see Exhibit 2 below). And now, at over half the total, changes to foreign assets overpower those to the less volatile US monetary base component that much more.

(Click for larger image) Exhibit 2: Volatility impact of foreign official liquidity on global total, 1970-2006

Twice since 1994 foreign official assets have been taken off the liquidity board - in 1998 and 2000 - and shortly afterwards the S&P500 made corrections (as in 10% or more). Today's context remains such that the weight and volatility of foreign official assets continues to demand investor attention: any contraction is a significant indicator of possible equity trouble ahead.

The last available data point for foreign official assets shows a 4.1% year-over-year expansion.

Sources: Federal Reserve Archival System (FRASER); Federal Reserve Economic Data (FRED); and Yahoo Finance

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  1. RJH Adams // 9/15/2006 08:57:00 AM

    NB: Typo alert - the bottom right hand text box in the first graphic should read 1998 to 2006.

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