About Me

Retired chief investment officer and former NYSE firm partner with 40 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 !!!

Tuesday, July 31, 2012

Monetary Policy

The Fed announces its latest rendition of monetary policy on Wed. Aug. 1. I confess I have been
an ardent student of how money and credit both reflect and affect the US economy since my
college days in the late 1950s. All of the different projects I have done on this subject suggest
clearly to me that monetary policy has a very powerful influence on economic affairs. So, I am a
believer in the old saw that: "The Fed writes the market letter". From my perspective, the US is
in, at best, lightly charted territory with regard to monetary policy  and the outlook for the economy.
With banking system interest earning asset growth at only 4% yr/yr and with my broad measure of
financial liquidity (financial system funding capacity) growing at only 2.6% yr/yr, the risk to
sustaining economic growth at even a modest 2% in real terms is pretty high, and the ability of
the economy to grow jobs sufficiently fast to bring down the unemployment rate is low looking out
over the next year. I continue to think the Fed is gambling with the recovery and that to be on
the safe side, the Fed should step up and provide substantial incremental monetary liquidity to
the system via purchases of quality fixed income securities. Banking System Credit Chart

If bank assets and funding were growing at 6% or better, I would be much more comfortable with
the economy and the stock market. The last time the Fed tinkered with a frozen monetary base and
neglible private sector credit growth was 1937 - 38, and as you have heard, that ended badly.

Possible Gamesmanship
Back on Jul. 6, I posted that the household employment survey had 800K jobs not yet picked
up in the payrolls survey data. Jul. Post With just about three months to go before the election,
it would not surprise me if payroll jobs growth did turn out stronger than now expected as
we head up to election day. I do not know whether the Fed is aware of this discrepancy in jobs
count or whether It cares much, but I have to say it could be a factor in their reasoning if the
FOMC has been "suitably apprised"......

Even so, I would like to see the Fed step up here at some point soon to provide more liquidity to
a system which needs it.

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