In this post, we’ll unpack all you need to know about the global liquidity cycle, defining exactly what it is, how it works, how it impacts the economy, how long it lasts and more.
What Is The Global Liquidity Cycle?
The Global Liquidity Cycle (GLC) refers to the fluctuation in the the amount of money that is available to flow through financial markets over time.
What Is Global Liquidity?
Global liquidity, is defined as the amount of money — both cash and credit — that is available to flow through financial markets.
How Does The Global Liquidity Cycle Work?
The global liquidity cycle works through alternating phases of liquidity expansion which is when liquidity increases and liquidity contraction which is when liquidity decreases.
When liquidity increases, there is more capital available for investment which drives asset prices up. Eventually imbalances arise which lead to the start of the contraction phase.
When liquidity decreases, there is less capital available for investment which drives asset prices down. Eventually imbalances arise which lead to the start of the expansion phase.
Global Liquidity & The Seasons Table Summary
Below is a table that compares global liquidity to the seasons.
How Does The Global Liquidity Cycle Impact The Economy?
The global liquidity cycle impacts various aspects of the economy. These include:
- Interest Rates: Liquidity expansion decreases interest rates. Liquidity contraction increases interest rates.
- Asset Prices: Liquidity expansion increases asset prices. Liquidity contraction decreases asset prices.
- Borrowing: Borrowing increases during liquidity expansion due to lower interest rates and decreases during liquidity contraction due to higher interest rates.
- Saving: Saving decreases during liquidity expansion due to lower interest rates and increases during liquidity contraction due to higher interest rates.
- Economic Growth: The cycle influences overall economic growth by affecting business investments, consumer spending and job creation.
- Investor Sentiment: The cycle shapes investor confidence, risk appetite and decision-making.
These impacts will differ in magnitude and duration based on the specific characteristics of each cycle and the underlying economic conditions.
How Long Do Global Liquidity Cycles Last?
Global liquidity cycles tend to span 4-6 years, as illustrated in the chart below.
However, it’s important to note that the duration of cycles can vary based on factors such as monetary policy, economic conditions, investor sentiment and global events.
Thus, when investing, it is essential for investors to monitor liquidity conditions and be aware of the potential risks and opportunities that arise from changes in the liquidity cycle.
Why Understanding The Global Liquidity Cycle Is Important
From an investment standpoint, understanding the GLC is essential to making more informed investment decisions and maximising investment profits.
It is essential to understand that timing the market is challenging and some may say should completely be avoided. However, a deep understanding of market cycles can provide investors with a strategic edge.
Summary (TL;DR)
The global liquidity cycle refers to the fluctuation in the availability and cost of money in an economy over time. It operates through alternating periods of expansion which encourages more borrowing, driving the economy to grow and contraction which encourages more saving, driving the economy to shrink.
Impacts of the GLC include interest rates, asset prices, borrowing, saving, economic growth and investor sentiment.
Understanding the mechanics of the GLC is key to making more informed investment decisions and maximising investment profits.
