As prior discussed, the steep downturn in the global economy since
Sept. '08 shredded Federal Reserve efforts to resuscitate broad
liquidity in the financial system. The commercial paper market
resumed a steep drop, and banks lost large institutional deposits as
players moved to the safety of Treasuries. My broad measure of
credit driven liquidity is now down about $120 bil. below this past
summer and stands only +1.5% measured yr/yr. The Fed has been
buying top quality financial commercial paper to prop up the system,
but large deposits continue to roll off, curtailing the Fed's latest
efforts. 90 day a2/p2 commercial paper trades infrequently and at
a horrendous 6.25%+.
Monetary liquidity has been soaring -- +11.5% yr/yr -- as the Fed
primes the pump. The data is biased up as smaller banks leave
some excess reserves in sweep accounts, but the basic money supply
is moving in the right direction. From a cyclical perspective, the
narrow money supply typically leads the broader credit driven
aggregates in time, and when the economy is rather weak the
recovery of private credit can lag. This is particularly the case when
the residential market is in distress. We know we have the most
depressed residential market we have seen in many years.
In the residential area, there is also the likelihood that deflationary
psychology is growing -- why buy now when house prices are headed
lower and job security is a factor?
The new Obama admin. may well review how to increase already
improving housing affordability further.
At least the Fed is on the case with allowing money to grow in the
system. that's where you have to start to repair the tatters. It is
genuinely too bad that Bernanke was so slow to turn to growing
Even though the broad measure of liquidity is up but 1.5% yr/yr,
there is excess liquidity in the economy overall. The $ value of
production is down 4.5% yr/yr through Nov. That leaves my
excess economic liquidity index at +6.0. Such a reading is normally
very positive for stocks, but I now keep this as a secondary
indicator since it failed badly during the bear market period of
2001 - 2002. However, it has been a good support measure over
the long run so we need to keep it very much in mind.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!