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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 !!!

Sunday, May 13, 2012

Financial System -- Liquidity Issues

Measured yr/yr, my broad measure of credit driven financial liquidity rose but 3.7% through
April, '12, and is up a scant 0.4% from mid - 2011. Monetary liquidity -- represented here by
M-1 -- accounts for about 18.5% of the broader liquidity measure. M-1 is up 18% yr/yr, but
is set to decelerate rapidly and could be down to only +4% yr/yr by the end of 2012. Short
term interest rates remain at nominal levels, but with decelerating liquidity, we are reaching
back into an era like the 1936 - 38 period, when premature liquidity tightening by the Fed
produced a damaging and wholly unnecessary recession. I think the Fed has about $100 bil. to
play with without being forced to announce a new QE program, so even though the liquidity
situation for the economy as well as the stock market is turning uglier, we are in an "early
warning" phase of an evolving liquidity squeeze. The best solution would be that extant
liquidity is sufficient to extend the economic recovery enough that banks further liberalize
lending, particularly in the real estate market. Barring that, Fed chair Bernanke, who is
gambling with the recovery right now, will be forced to put forth a new QE program of
sufficient size to keep the economy going. Many players are already assuming that such a
program will be forthcoming especially in view of the fiscal austerity set to kick in at the
end of 2012. And more so if the President and the Congress continue to bungle whatever
negotiations may take place.

Since I try to make as few assumptions as I can when looking at the economy and the markets,
my view is that fundamental risk for the economy and for stocks is on the rise and that Bernanke's
hand may well be called before year's end 2012 if the banks do not loosen up further.

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