Palanor: Liquidity

Overview

Palanor: Liquidity is the weather, not the climate — a 0–100 read of how plentiful or scarce dollar liquidity is right now. It rises when the Fed is expansive, when credit spreads are tight, when the dollar is soft, and when policy rates sit below their neutral anchor. It falls in the inverse regime. We watch this index because almost every other reading — risk appetite, inflation pressure, equity multiples — bends to it.

Why these components

The Fed balance sheet (WALCL) carries the largest weight because base liquidity sits upstream of everything else; we use the 12-month percent change so that the contribution reflects regime — easing, neutral, tightening. The reverse-repo facility (RRP) is included with a negative sign: when RRP balances rise, excess liquidity is draining out of the banking system into a sterile Treasury facility. Credit spreads (high-yield and investment-grade OAS) are the market's real-time price of liquidity at the riskier end of the curve; they widen when liquidity withdraws. The trade-weighted dollar (DXY) is the cross-border lever — a strong dollar tightens global liquidity even when the domestic balance sheet is steady. The fed funds rate is recentered to a neutral anchor near 3.5% so the index reads accommodation vs. restriction rather than absolute level.

Methodology

Each component is transformed to a comparable z-style scale (z-score over 24 months, 12-month % change, or level recentered to a neutral anchor) and sign-flipped where negative. The weighted sum is mapped through a logistic function to 0–100. Missing components are dropped and remaining weights renormalized.

Interpretation

Readings above 65 indicate a flush liquidity regime — the kind in which risk assets reach for multiples and credit can absorb shocks. Readings below 35 indicate a draining regime, in which financial conditions are tightening regardless of what the Fed has formally announced. Sharp inflections in this index lead most other macro narratives by weeks.

Caveats

Liquidity is a much-debated construct. There is no single canonical measure. This index is a working composite, not an academic one. It is most useful for direction-of-travel and regime detection, not for level claims. The neutral-rate anchor at 3.5% is a working assumption; reasonable analysts hold it anywhere from 3% to 4%.

Components & Weights

Every component, every weight. The 30-day spark shows how the underlying series has moved; the transform column shows how it converts to a comparable scale before weighting. Direction indicates whether rising values raise or lower the index.

Historical

24-month history of this index. The composite is recomputed daily; values are stored with timestamps.

References

• FRED — Federal Reserve Economic Data, St. Louis Fed. https://fred.stlouisfed.org/
• Atlanta Fed — Wage Growth Tracker and Sticky-Price CPI. https://www.atlantafed.org/research
• Cleveland Fed — Model-based inflation expectations. https://www.clevelandfed.org/our-research/indicators-and-data
• OECD — Composite Consumer Confidence Indicator. https://data.oecd.org/leadind/consumer-confidence-index-cci.htm
• CNN Business — Fear & Greed Index. https://www.cnn.com/markets/fear-and-greed
• Google Trends — interest over time. https://trends.google.com/