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The writer is managing director at Crossborder Capital and author of ‘Capital Wars: The Rise of Global Liquidity’
The gyrations in global liquidity — the pool of cash and credit shifting around financial markets — over the past few years have proved a prescient guide to future investment performance.
It is not only interest rates that matter in a world where vast stocks of existing debt have to be regularly refinanced. The balance sheet capacity of the world’s credit providers is also critical.
Now liquidity conditions appear to becoming easier, with international funding markets finally thawing. Rising bank share prices over the past two months and the crowded new year corporate issuance calendar provide evidence of that.
Our research suggests flows of global liquidity accelerated higher into early 2024, expanding by 9 per cent at an annual rate from September, led by strong increases in Japan and China.
At the end of 2023, we estimate global liquidity hit $168.2tn, or a 3 per cent increase on the previous year. This was led by a 3.8 per cent rise in conventional bank credit and a 2.2 per cent expansion in shadow banking activity. The eurozone and the UK went against the trend, suffering a fall in liquidity in 2023.
The public face of the US Federal Reserve is to emphasise quantitative tightening — the retreat from the era of the massive expansion of its liquidity support for markets and economy known as quantitative easing. And in 2023, its size of its balance sheet fell 7.5 per cent as funds raised from maturing US Treasury holdings were not reinvested.
However, measures of Fed liquidity injections into US money markets show a sharp jump higher. QT was partly offset by the Fed’s emergency Bank Term Funding Programme that offered loans to banks in the wake of the collapse of Silicon Valley Bank. Banks also parked less cash at the Fed through its so-called reverse repo facility. Overall, liquidity injections increased by 13 per cent in 2023, broadly matching the rise in the value of US financial wealth (if using a rough benchmark such as a 60/40 portfolio in international stocks and US Treasuries).
In 2024, we expect greater liquidity support from central banks as more policymakers turn towards monetary policy easing.
Aside from the Fed, the People’s Bank of China is the obvious central bank to watch. From mid-2023, it engaged in large-scale operations that injected some Rmb6.2tn ($850bn) into domestic money markets, reversing its previous tight stance. This is local currency credit, but I argue this is partially fungible and helps explain large capital outflows from China into, say, sovereign bonds.
In addition, Chinese commercial banks increased their lending by more than 10 per cent last year, with the previously rapacious shadow banking sector mustering a 4 per cent rise. The PBoC contributed almost one-fifth of the total increase in global liquidity last year. Plainly, a lot of this spilled abroad.
With many central banks, notably the Fed and PBoC, now considering greater policy easing, we expect a $5tn liquidity contribution from this source in 2024.
On top of this, assuming that bond markets will be robust after the hiatus triggered by the SVB failure last year and that currencies and commodity prices will be more stable, we estimate that collateral-backed lending markets should be able to support a rise in overall global liquidity of about $15tn, or close to a 10 per cent gain for the year.
Remarkably, global liquidity last hit a low point some 15 months ago in October 2022, or shortly after the British gilt market crisis in the previous month. This proved a significant inflection for investors and risk markets bottomed shortly thereafter, with liquidity-sensitive asset prices — such as US technology shares and cryptocurrencies — racing higher through the past year.
Set against the $50tn-$60tn of world debt (roughly one-seventh of the global total) we estimate needs refinancing this year, funding tensions will not quickly disappear. Nonetheless, with global liquidity already accelerating, 2024 may prove less of a challenge than last year.
What’s more, that is a good sign for the global economy. Put into a cyclical context, global liquidity typically fluctuates over a five- to six-year timespan. Given rising debt levels, that seems to have a growing sway over the conventional business cycle through changes to asset prices and access to funding markets.
We do not expect the latest liquidity upswing to peak before late-2025, which should give succour to investors. All the money that is anywhere must be deployed somewhere.
