The Fed's balance sheet and the monetary base both have been flat for a year now, but there is
still solid residual growth in the M-1 measure which lightens the stress from the shutdown of QE.
The US economy and the stock market have held up decently. Private sector liquidity growth has
been adequate to fund a modestly expanding real economy and low short term interest rates and
non-existent current inflation have kept equities players from abandoning stocks where they can
earn 2.2% to hang around and see how 2016 shapes up.
The banks have been expanding the loan book with more categories seeing rising outstandings.
The system is not aggressively chasing deposits but has been content to ease up on balance sheet
liquidity constraints to meet higher credit demand. Overall, the banking system and consumers
are maintaining sufficient confidence to underwrite modest economic growth in the absence of
further quantitative easing by the Fed.
Private sector funding has been growing at around a 5% annual rate for a number of months and
with low real output growth and zippo inflation, the system has been generating more liquidity than
the economy actually requires. However, the capital markets have not benefited as investor
confidence in both the stock and bond markets has deteriorated as measured by widening credit
quality spreads and the progressive loss of positive price momentum in stocks overall. In fact,
institutional money market holdings in the US have increased by over $100 billion or nearly 9%
over the past 18 months and the guys appear ready to see the new year ushered in before
getting off their hands.
- Peter Richardson
- 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 !!!