Great piece indeed! It puts together all key ratios to be followed for a solid asset allocation framework. May I ask how you build the liquidity proxy? Is it based on the single components of the Fed’s balance sheet, or is it a broader measure?
The USD proxy liquidity index is made of the FED Balance Sheet; the TGA; the RRP and the BTFP. While it is just a proxy it gives a decent trend in the shadow liquidity which impact the financial markets and the business cycle in general.
I understand. I also noticed that different risk premia move in line with the liquidity index. Cyclical to defensives, cyclical versus defensive currencies and so on. And, of course, liquidity leads the economy. Surprising US manufacturing never reacted. Anyway, than you for the nice framework!
In an inflationary bust you want to avoid long maturity assets such as Government Bonds and Stocks but you also want to have a protection against inflation meaning that gold will protect you better than cash against the inflationary environment.
If you are not convince look at how gold has done during the 1970s in the US in nominal and inflation adjusted.
Great piece indeed! It puts together all key ratios to be followed for a solid asset allocation framework. May I ask how you build the liquidity proxy? Is it based on the single components of the Fed’s balance sheet, or is it a broader measure?
The USD proxy liquidity index is made of the FED Balance Sheet; the TGA; the RRP and the BTFP. While it is just a proxy it gives a decent trend in the shadow liquidity which impact the financial markets and the business cycle in general.
I understand. I also noticed that different risk premia move in line with the liquidity index. Cyclical to defensives, cyclical versus defensive currencies and so on. And, of course, liquidity leads the economy. Surprising US manufacturing never reacted. Anyway, than you for the nice framework!
https://evergreengavekal.com/blog/four-baskets-for-four-quadrants/
thanks, how come your 4 quadrants are not the same as Gavekal ones ? cf link above
Read carefully the 4 quadrants
I did, for example:
- for MacroButler, Inflationary Bust = Gold
- for Gavekal, Inflationary Bust = Cash
In an inflationary bust you want to avoid long maturity assets such as Government Bonds and Stocks but you also want to have a protection against inflation meaning that gold will protect you better than cash against the inflationary environment.
If you are not convince look at how gold has done during the 1970s in the US in nominal and inflation adjusted.
Please refer to these 2 previous newsletters
https://themacrobutler.substack.com/p/gold-is-for-war
https://themacrobutler.substack.com/p/a-compass-to-navigate-stormy-waters