Why watching Global Liquidity is so important

‘Liquidity Investing’ Or Why The ‘Fed Model’ Is Wrong

 

‘Standard asset allocation models, such as the ‘Fed model’, are derived from individual security analysis and pay scant attention to aggregate investor behaviour and the credit cycle. Instead, too much weight is placed on near-term reported profits, while changes in the discount factor are largely ignored. In this report we show that the bulk of variation in stock prices, up to approximately a 5-year horizon, is dominated by changes to the discount factor. The discount factor is moved around by inflation and liquidity. We propose an alternative framework that captures these changes.

 

 

 

See our latest published research, Global View: ‘Liquidity Investing’ Or Why The ‘Fed Model’ Is Wrong – 30^th June 2023