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 !!!

Sunday, November 16, 2014

Liquidity Cycle

Measured yr/yr, total US system liquidity growth (including the Fed's balance sheet) is in a
downtrend but remains a significantly positive 8% going into early Nov.. The stronger liquidity
growth since the latter part of 2013 has supported an acceleration in business activity with
US sales running about +6.5% yr/yr and SP 500 net per share rising more (Latest 12 mo. eps
is running about $115).

Hefty liquidity growth  normally underwrites an eventual cyclical acceleration of the inflation
rate, but that has yet to happen as slow global economic growth coupled with modest gains in
production capacity have kept pricing relatively stable at a nominal level.

Private sector liquidity growth has been averaging 5.8% on a yr/yr basis, and with no more QE,
total US system liquidity growth by late 2015 could be down to about 4 - 5%. This suggests
that looking out to mid - 2016, business sales and earnings growth could be very much more
moderate than today with business pricing power remaining muted.

Thus it is that at the G-20 summit this week in Brisbane, participants pledged to use fiscal
policy, trade deals and, probably, more monetary easing to produce an additional $2 trillion
in global GDP over the next couple of years. We certainly do not know whether they will
be successful, but we do know they fear the return of the deflation wolf to the door.

From this point on, I regard the base economic case for the US to be veering toward the grim
side eventually and I would be delighted to be too conservative and to be wrong. For now, the
US should find the sailing relatively smooth as the liquidity tailwind is still fairly strong and
is moderating at a measured pace. But this will change as time wears on.

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