Financial System Liquidity

1) My broad measure of credit driven liquidity or bank funding capacity is continuing to
show accelerated growth and is now up 6.8% yr/yr. This is good news for the economy
and it is also nice to see that all major funding categories are finally on the rise. The basic
M-1 money supply is still contributing to broader liquidity growth, but it is counting for
proportionally less as time moves on.

2) Banking system total interest earning assets are up about 6% yr/yr, the minimum rate
I would like to see to sustain economic expansion. The banking system's loan book is up
about 5%, held back by continued ever so modest expansion of the real estate book as
housing activity and real estate development remain well below pre - recession levels
and as banks concentrate on booking fees for mortgage refinancing and portfolio quality
upgrading.

3) Fed Bank Credit has been expanding rapidly in recent months via the new QE program,
but assets on the Fed's book are up but 2.9% yr/yr. Since broad business sales growth rose
only 3 - 4% over the past year, the slow pace of QE measured on a 12 month basis did the
economy no favors. The practically wise course for the Fed would be to stick with the
now more rapid QE program until business and private sector credit demand strengthen
and confidence increases to levels which can allow self - sustaining economic growth.

4) Recently, the annual growth of broad credit driven liquidity did exceed the advance in
business sales measured yr/yr, thus allowing liquidity to flow beyond the needs of the
real economy and primarily into equities. This flow of liquidity was last seen in late 2009
and is a measure of how tight the banking system has been in extending credit to the private
sector. Excess liquidity relative to real economic demand only helps stocks when investor
confidence is reasonably strong which it has been since mid - 2012 when the Fed first
signaled new QE. Folks have been happy to buy stocks on the premise that major new QE
from the Fed will lead to faster business growth. But, such must begin to unfold soon to
keep confidence levels up.

5) Money market fund (MMF) balances were drawn down heavily from mid - 2009 through
2011 as money flowed into the capital markets with some also finding its way into the
purchase of goods and services. Since the end of 2011, fund balances have remained
fairly steady even with scant returns on MMFs. If fund participants have invested or spent
their discretionary cash, future moves in the capital markets are more likely to remain
strongly rotational.