Liquidity Situation

The Fed has been slow to provide incremental monetary
liquidity to the system for the forthcoming holiday
season. So far, the Fed has been wary in view of
continuing very strong bank loan growth. The real
estate loan book of the banking system continues to
grow at close to 10% yr/yr as banks pick up residential
re-fi business and enjoy strong demand for commercial
real estate mortgage and development needs. Moreover,
despite the economic slowdown, commercial and industrial
loan demand has remained very brisk, now reflecting the
sharp rise in order backlogs for long completion cycle
real estate and commercial aviation projects. Even
HELOCs, or home equity loans, have accelerated after a
lengthy quiet period. Banks have also added moderately
to Treasury positions as well. Overall, the larger
measures of bank funding have grown 9.1% yr/yr in aggregate.

When broad liquiidity growth exceeds broad economic growth
as it has been doing in recent months, some of the excess
tends to find its way into the stock market, as it has this
time out. I have to admit that the working capital needs
for the long completion cycle projects caught me by
surprise, leaving a significant extra fillip to excess
liquidity.