Liquidity Factors

Federal Reserve Bank Credit
The Fed is keeping its balance sheet greatly enlarged to support the
financial markets and the economy, with credit out more than double
a year ago. The Fed has allowed a couple of the TALF facilities to
lapse, so that credit offered is about $200 bil. below the peak level
seen in 12/08. To return to more normal pre-crisis levels, the Fed
will need to let about $1 tril. of swap facilities expire and will be
under close scrutiny when economic recovery is underway.

Monetary Liquidity
Thanks to massive liquidity infusions in Half 2 '08, the 5 year growth
rate for the basic money supply has risen to 6% and 3% inflation
adjusted. This is adequate for economic pump priming and is vital
now since consumers have been paying down installment debt and
have been purchasing on a cash and carry basis.

Credit Driven Liquidity
My broad measure of credit driven liquidity is down an astounding
0.7% yr/yr, with both commercial paper and jumbo bank deposits
lower. The market for financial service company commercial paper
is about $1.2 tril. or 53% below the 8/07 level, which was the high
water mark for the shadow banking system and the CMO market.

The banking system's loan book is contracting and is at levels last
seen in early 2008, at the outset of the recession. Even so, the loan
book is a full $1 tril. or 14% above a reasonable and conservative
longer term trend. The boyz went on quite a bender from 2003 -
2008. The loan book could remain flattish for another 12 months
even if the economy recovers.

Excess Liquidity Measure
The $ cost of US production is down nearly 15% yr/yr. Thus, even
though the broad measure of credit driven liquidity is down yr/yr,
large production losses and mild deflation have created substantial
excess liquidity in the system. Put another way, the velocity of
money has fallen very rapidly, as the economy has shrunk even
faster than the financial system.

Excess economic liquidity usually, but not always, forms a strong
tailwind for the stock market as investors have funds to anticipate
an economic recovery.

Trade Window Liquidity
A collapse in US trade saw imports fall far more rapidly than did
exports. The outflow of dollars from the US has declined deeply and
rapidly, forcing the major central banks to engage in a variety of
sizable currency swaps to keep the global system halfway liquid. Still,
the inability of smaller, less seasoned economies to earn reserves in
these treacherous times has worked hardships and leaves capital
flows restrained. There will be more financial fall out in the form of
failed loans abroad.
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As tattered as it is, the global liquidity framework should be sufficient
to edge economies forward into recovery if confidence returns as
expected.