World economy 'close to the bottom' of liquidity cycle

World economy 'close to the bottom' of liquidity cycle
Morgan Stanley has begun to detect early signs that the global economy may be nearing the bottom of the cycle.

By Ambrose Evans-PritchardLast Updated: 9:27PM GMT 18 Jan 2009
It is advising clients to ignore the deep gloom in the markets and focus on deeper fundamental forces as a fresh phase of liquidity gathers strength. However, it is still too early to buy stocks.
"Excess liquidity has started to rise again in the G5 (US, Japan, Germany, Britain and France) for the first time inalmost three years," said Joachim Fels, the US bank's research chief.
"In our view, this marks the beginning of a new global liquidity cycle in 2009. It is driven by unprecedented easing of monetary policy as well as the gradual healing of impaired financial systems."
Dr Fels uses a complex recipe to measure the excess money sloshing through the world's financial system. This is how each long cycle of rising asset prices first builds a foundation.
"As in past episodes, excess liquidity will find its way into asset markets. To some extent, this has already started to happen, with government bond yields having been pushed to new lows, credit spreads coming in and equities having bounced off their lows from last Autumn."
The bank favours corporate credit at this stage rather than government bonds. It likes emerging markets such as the BRICS – Brazil, Russia, India and China – rather than equities in the old world.
Dr Fels says liquidity is the key driver of asset booms and busts. It drove the bond rally in the early 1990s and the dotcom bubble in the late-1990s.
Morgan Stanley said investors must monitor the entire global liquidity picture to understand what is going on in today's cross-border markets.
Teun Draaisma, the bank's European investment guru, said stocks tend to rally roughly six months before the US property market touches bottom in each cycle – although that is not what occurred in the relatively modest housing slide in the early-1930s.
By this measure, it is still too early to take the plunge in the stock markets. His team expects US house prices to keep falling until the middle of 2010, dropping a total of 46pc from peak to trough. They are down 24pc so far.
"Patience is the golden rule in bear markets, and the bigger the crisis, the more patience is required," he said.

http://www.telegraph.co.uk/finance/globalbusiness/4284602/World-economy-close-to-the-bottom-of-liquidity-cycle.html