Darius Dale, founder & CEO of 42Macro, talks about the future impact of global liquidity on asset prices, the relationship between global liquidity and asset classes, drivers of global liquidity, and current market conditions for creating liquidity.
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Quick takeaways
Global liquidity is a major driver of asset prices, with high liquidity leading to high asset market prices and vice versa.
The US dollar real effective exchange rate, currency volatility, and interest rates are key factors driving global liquidity.
Deep dives
Global Liquidity as a Key Driver of Asset Prices
The podcast episode discusses the importance of global liquidity as a major driver of asset prices. The speaker emphasizes that global liquidity, which includes the global central bank balance sheet, global money supply, and global FX reserves minus gold, has a significant impact on the performance of risk assets such as global equity markets and Bitcoin. They highlight that when global liquidity is high, asset market prices tend to be high, and when it is low, asset prices tend to be low. The podcast also explores the correlation between global liquidity and various assets like S&P, Bitcoin, Ethereum, US Treasuries, and US corporate credit.
Understanding the Drivers of Global Liquidity
In this part of the podcast, the speaker delves into the different factors driving global liquidity. They emphasize the need to forecast liquidity to make informed investment decisions. The speaker explains that the US dollar real effective exchange rate and currency volatility have a highly inverse correlation with global liquidity. Additionally, interest rates play a role in driving global liquidity as it tends to spike after interest rates increase and fall after interest rates decrease. The relationship between interest rate volatility, bond market volatility, and global liquidity is also discussed, highlighting the patterns that emerge.
The Relationship Between Global Liquidity and Economic Cycles
The podcast episode delves into how global liquidity is affected by cyclical upturns and downturns in growth as well as inflation. It is explained that more global liquidity tends to follow a growth slowdown or a decline in inflation, while less liquidity is observed during periods of rising growth and inflation. The speaker highlights the lag effect of global liquidity in response to these economic cycles. They also mention the importance of understanding both private sector and public sector liquidity, as private sector actors significantly contribute to global liquidity, especially in international investment surplus economies. The relationship between private sector flows, interest rate volatility, currency volatility, and global liquidity is explored.
Darius Dale is the founder & CEO of 42Macro. In this conversation we talk about global liquidity, what drives it - both in private & public sector, and how to understand its future impact on asset prices.
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Pomp writes a daily letter to over 250,000+ investors about business, technology, and finance. He breaks down complex topics into easy-to-understand language while sharing opinions on various aspects of each industry. You can subscribe at https://pomp.substack.com/
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