What is the liquidity drain in busines.

                                   LIQUIDITY DRAIN?

Monetary policy around the globe is increasingly diverging,
with tightening financial conditions in the U.S. and U.K. and
mostly looser policies elsewhere (page 3). The Fed may start
raising rates as wages rise in an improving labor market, but
halt its tightening cycle at a historically low level (pages
14–15). The strengthening U.S. dollar is a dampener on
global liquidity. Liquidity injections by global central banks slowed in 2014 as
the Fed wound down its bond buying program. The BoJ has
grabbed the baton and doubled down on its monetary stimulus.
See the chart on the right. Does 120 yen of BoJ QE really equal
$1 of Fed QE? Some of Kuroda’s largesse will undoubtedly
pass through Narita Airport, but its effect on most global
markets is likely limited.The eurozone is in a rut (pages 16–17). The ECB is committed
to expanding its balance sheet and may finally unleash the
monetary stimulus markets have been hoping for: buying of
sovereign bonds. Japan is holding off on raising its sales tax
as its economy has again dipped into recession.Nominal growth in many emerging markets is subdued,
according to the latest IMF forecasts, as export machines
throttle back (pages 18–19). India and China are still growing
at very high absolute levels, however, and both countries are
relaxing monetary policy. China’s growth is coming off an ever
larger base, meaning its absolute demand for commodities
and machinery is still increasing.
Regional political and military conflicts abound (page 12)
and could trigger wholesale “risk-off” market moves if not
contained. Next year’s calendar is led by the U.K. elections,
which could revive talk of an EU breakup, but is lighter on key
emerging market polls than 2014 (Nigeria is an exception).
See the map below for other key events.
Valuations
Easy monetary policy has suppressed volatility and pushed
up asset prices across the board. Many assets look cheap
only because everything else is so expensive. Valuations range
from sky-high (safe-haven government bonds) to average
(most credit and developed equities). See the chart below.
Not much has changed in the past year, with three exceptions:
} Eurozone investment grade credit has become more
expensive and most sovereign debt has rocketed to record
valuations. Spanish 10-year bonds have returned 73% since
ECB President Mario Draghi in 2012 promised to do “whatever
it takes” to preserve the euro.

} U.S. equities have moved up to the 77th percentile of their
historical valuation range. The good news: Gains have been
aided by robust profit growth.
} EM equities are diverging, with Indian stocks re-rating
upward but most other equities becoming even cheaper.
EM hard currency debt appears to be good value.
The bottom line on valuations: We have picked the lowhanging
fruit and are now high up on an increasingly shaky
ladder, reaching for the remainder. It is an accident waiting to
happen—unless we occasionally take a few steps back to
make sure the ladder is well balanced.Government bonds rallied throughout much of 2014, defying
consensus forecasts for a gradual rise in yields. Disappointing
growth, limited supply and a steady bid for yield from asset
owners with long-term liabilities helped bonds outperform.
Inflows into exchange-traded bond funds looked set to beat
the previous bumper year of 2012, when the eurozone crisis
triggered a dash for safe-haven bonds. See the chart above.
Complacency.

The U.S. high yield market is a canary in the coal mine. It is at
the bottom of the capital structure (only equities are lower),
where defaults first bite. The performance of high yield bonds,
therefore, should be company specific and varied. If you are
not getting dispersed returns in this asset class, something
is wrong: Investors are too complacent.

Whenever dispersion falls to trough levels (we define these as
the 10th decile of a range going back to the mid-1980s), markets
often reverse sharply. See the chart below. Our complacency
gauge once again is flashing red. Note: We still expect U.S. high
yield to perform well in the near term due to solid U.S. growth
and low default rates. Yet our gauge suggests we are closer
to the end of the financial cycle than the economic cycle.