About Me

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 !!!

Wednesday, August 18, 2010

Stock Market & Financial Liquidity

I downgraded this type of work over 2001 - 02, when massive
excess liquidity gave a false buy signal for stocks. But the work
can still be effective, so I keep up on it and use it as a secondary
indicator.

Measured yr/yr, the $ value of industrial production reached
its strongest % change numbers in recent months since the mid-
1990s. Compared against my broad measure of credit driven
financial liquidity, it surged, leading to a large increase in money
velocity and a consequent sharp drop of liquidity. That sort of
development is usually a negative for stocks as the real economy
draws available liquidity away from the stock market. We did see
a roughly comparable situation to the present in 1994 -1995
when strong production growth far exceeded broad financial
liquidity growth. Interestingly, the liquidity situation improved
substantially over 1995 as the momentum of production growth
eased and financial liquidity growth accelerated. This development
helped much to underwrite a strong stock market from late 1994
through mid-1998.

To see a similar development over the next 12 months, we might
look for the yr/yr growth of the $value of production to moderate to
a more sustainable but positive level and also see a marked
acceleration of private sector credit and funding growth. This
re-balancing would signify that recovery is on a more sensible
path and it would sharply reduce the liquidity deficit headwind the
stock market is now encountering. So far, however, we have yet
to see the private sector "loosen up" to conduct commerce with
more credit usage.

The foregoing might strike some readers as mere fancy footwork,
but that would be to miss an important point: Over time, the stock
market does compete with the real economy for liquidity.

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