Rather than trying to make sense of the massive number of market data signals (which seem to change daily) we closely track a few indicators of liquidity expansion / contraction in order to forecast market changes. Our lead premise is that flow of funds analysis — changes in liquidity flows — is the single most powerful indicator of economic changes that follow.
While global savings has remained virtually constant since 1980, global liquidity has skyrocketed through various financial innovations — creative ways of generating new ways to make credit available. So, following the ebbs and flows of liquidity is to follow the ebbs and flows of available credit. This is the modern world; liquidity ⇔ credit.
We therefore think of liquidity in terms of the sources of credit available for use in the private sector, rather than the traditional way of defining money supply as bank deposits, which is technically describes the uses of funds. This is an important distinction. When sources of credit are relaxed in a country or industry sector, they are invariably drawn upon by hungry borrowers. Liquidity creation inevitably follows, with investment opportunities close behind.
Extensive research and sources show that changes in markets are preceeded by identifable changes in liquidity flows — measured by available credit — either into, or out of, a sector or country. By identifying the macro liquidity (credit) shifts, we have advance indicators of market and economic changes that are likely to follow.
We note from historical review that it often takes roughly six months for a liquidity event to work its way through the financial system to produce identifable results. But whether any particular timeframe is shorte or longer, there is virtually always time to adjust after the initial macro liquidity credit trigger is identified. We track and research macro drivers of liquidity (credit), including:
Eash of these macro drivers contribute to expansion / contraction of liquidity — either in specific markets or in the global market system. Taken together, an endless global “tug-of-war” over access to liquidity takes place.
We use this information to prioritize and rebalance possible funds and ETFs based on changes in liquidity pools. This information is provided periodically for the benefit of our plan participants, to inform fund selection. The logic behind this approach is explained here.
We research each liquidity driver extensively, then combine our research into a single model, showing the factors expanding lqiuidity, and the factors draining liquidity. These give us an updated forecasting.
Based on each forecasting model, we are able to identify which funds in our investment lineup align with liquidity changes — and which do not. This offers insights for our Plan Participants to consider when rebalancing their 401(k) accounts.
Each month we update our forecasts using the above method of identifying liquidity changes and drivers. These are available periodically on our Insights page.