Lesson 5
Global Liquidity
Track global liquidity aggregate, not just the Fed. When Fed tightening is offset by PBoC easing, the net effect on risk assets is less negative. The Global Relay is real — East can save West.
📊 Indicators mentioned in this lesson (click for details):
Markets are global. Analyzing only US liquidity will lead you astray. You must track the entire $170+ trillion global liquidity pool.
The Global Liquidity Pool:
- US Federal Reserve + Treasury
- People's Bank of China (PBoC)
- European Central Bank (ECB)
- Bank of Japan (BoJ)
- Bank of England (BoE)
- Plus smaller central banks
Why Global Matters:
Capital flows across borders. When the Fed tightens but PBoC eases:
- Chinese liquidity can support global asset prices
- Dollar may weaken (non-US currencies stronger)
- Commodities get support from China demand
- Global risk assets may perform better than US-only analysis predicts
The Global Liquidity Cycle (Howell):
- ~65 months trough-to-trough on average
- Driven by debt refinancing walls (corporate and government debt matures in clusters)
- Trackable and partially predictable
- Currently the most useful 'timing' framework
Measuring Global Liquidity:
- Sum major central bank balance sheets (in USD terms)
- Track Global M2 (GLOBAL_M2) (Howell provides estimates)
- Watch DXY for currency effects on translation
- Compare US vs non-US momentum
The Currency Translation Effect:
Global M2 (GLOBAL_M2) in USD terms includes currency effects. If the dollar weakens, foreign money supplies look larger in USD terms. This mechanically 'increases' global liquidity in dollar terms, even if nothing changed abroad.
Check your understanding
Lesson Quiz
Quiz Check
What is the '~65-month liquidity cycle' that Howell identifies?
Quiz Check
The Fed is tightening aggressively, but the PBoC is easing. How should you analyze global liquidity?