Darius recently joined Anthony Pompliano to discuss the outlook for global liquidity, the influence of the U.S. dollar on global liquidity, the potential economic impact of Trump administration immigration policies, and more.
If you missed the interview, here are the three most important takeaways from the conversation that have significant implications for your portfolio:
1. What Is The Outlook For Global Liquidity?
At 42 Macro, we track global liquidity using our Global Liquidity Proxy, which aggregates global central bank balance sheets, global broad money supply, and global FX reserves (excluding gold). We then add a global bond market volatility overlay to simulate the impact of the expansion and contraction of the global repo market.
Our models currently indicate that liquidity is currently moderating—not just globally, but also within most major economies.
We also track the leading indicators of global liquidity, such as stock and crypto market capitalizations, the U.S. dollar and currency volatility, global interest rates and bond market volatility, as well as global growth, inflation, and unemployment.
Our analysis of these leading indicators currently suggests a modest decline in global liquidity over the medium term. Combined with the current downtrend in liquidity across most major economies, this signals an environment that is unfavorable for asset markets from a global liquidity perspective. Rising US liquidity may offset that early in 2025.
2. What Role Will The US Dollar Play In Driving Global Liquidity?
Our research at 42 Macro includes comparing the year-over-year rate of change in our Global Liquidity Proxy to that of the USD Real Effective Exchange Rate and the CVIX. Our analysis indicates there is an inverse correlation between the dollar and global liquidity, as well as between currency volatility and global liquidity.
Currently, the strong U.S. dollar and rising currency volatility are exerting downward pressure on global liquidity. Looking ahead, potential policies under the new administration, such as tariffs and pro-growth, reflationary initiatives, could prompt the Federal Reserve to adopt a less-dovish monetary policy outlook relative to current market pricing, which may further strengthen the dollar.
If these scenarios unfold and we see sustained dollar strength and higher currency volatility, it would create an additional headwind for global liquidity, compounding the pressures already signaled by our leading indicators.
3. How Would Trump Administration Policies On Immigration Likely Impact the Economy?
We have recently highlighted in our research that one positive outcome of open borders and the influx of illegal immigrants has been a significant deceleration in wage growth.
Specifically, the Private Sector Employment Cost Index peaked at around 6% in 2022 and has since slowed to approximately 3%. This decline also drove a sharp deceleration in Unit Labor Cost Inflation, from roughly 6% in late 2021/early 2022 to approximately 1% today.
Reducing the influx of illegal immigrants, even modestly, would likely lead to a tighter labor market, faster wage growth, and higher unit labor cost inflation. Without a corresponding increase in productivity growth, corporate profit growth would likely slow as a result.
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