GlossaryLiquidity Risk
Liquidity Risk
Liquidity Risk condenses US financing conditions into a single number between 0 and 1: 0 is very loose, 1 is very tight. Seven macro series feed into it, from interest rates, the dollar, the Fed balance sheet and credit spreads. The score describes the environment risk assets are moving in, not their direction.
Zones
| Range | Rating |
|---|---|
| below 0.25 | Very Loose |
| 0.25 to 0.50 | Loose |
| 0.50 to 0.75 | Tight |
| from 0.75 | Very Tight |
The colors run from green through yellow-green and orange to red. The axis is fixed from 0 to 1, with reference lines at 0.25, 0.50 and 0.75.
How to read it
On the chart, the score appears as a staircase with one step per month. A completed month applies from the first of the following month. The current month appears from its most recent observation and can still change until the end of the month. Because the calculation runs on months, every timeframe shows the same staircase, the finer ones just drawn more finely.
- Above 0.75: Money is expensive, the dollar strong, the Fed balance sheet shrinking. Risk assets face a headwind.
- Below 0.25: Low rates, a growing balance sheet, a weak dollar. An environment that supports risk.
- Direction: A score that rises over months shows tightening conditions, even if the zone is still the same.
Limitations
- All seven series are required. The constant is calibrated to the sum of all terms. If a series is missing, the pane stays empty rather than showing a number that only looks like the score.
- Warm-up: The curve only starts once all seven series are available and the balance sheet has 36 months of lead-in for the trend term.
- Capping: Values below 0 or above 1 are cut off. In extreme phases, the curve lies flat at the edge without showing how far beyond it it would go.
- Fitted, not derived: The weights reproduce an existing curve. Outside the conditions of 2004 to 2026, the formula can be off.