My approach to understanding the US economy and the capital
markets has left me in an uncomfortable position at this
point. I do key heavily off the liquidity cycle on a
fundamental basis, and as of today's available data, liquidity
is flat or down some in the short run. I think it can take a
good six months to determine how positively the economy will
respond to changes in the liquidity picture going forward.
With the 50 bp cut in the FFR% to 4.75%, the Fed is signaling
that it is prepared to provide faster growth of monetary
liquidity via open market purchases of Treasuries and other
securities. It is far less clear when and how rapidly credit
driven liquidity will resume its growth.
The broad economy has yet to show the sort of imbalances that
assure a recessionary period, while on the negative side, the
level of residential construction is still running well
above levels seen in prior downturns, and could fall considerably
further before settling out. I also remain concerned that
system capacity growth continues well below underlying demand
growth potential. In this latter regard, should the economy
respond positively and quickly to an easing of monetary policy,
more sustainable inflation pressure could appear.
I have maintained since late 2006 that I would let the other guys
do the forecasting. I had hoped that by autumn of this year, the
horizon would be easier to discern, but, regrettably for me, the
economic horizon has a heavier layer of fog on it than it did
going into the year. For now then, I'll maintain a shorter term
perspective, since I cannot say with conviction that this stretch
of bumps to confidence and higher volatility has ended.
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