Financial System Liquidity

Conventional Credit Funding
My broad measure of credit driven liquidity has started to experience volatile but accelerated
growth. Critically, measures of funding liquidity exclusive of the Fed's QE program are now
expanding. The banking system is stepping up competition for deposits and is issuing more prime,
unsecured commercial paper. Consumer credit is starting to nudge ahead and shorter term business
credit demand, led intially by premier commercial paper, has turned up clearly and is broadening
out. The banking system's loan / lease book is  still contracting, however, and this reflects a
continuing run off of the system's large real estate loan portfolio, where activity remains moribund.
Because of the weak real estate credit demand picture, we are seeing banks continue to add to the
Treasuries investment portfolio -- a rare occurrence once business lending picks up. On balance,
this is good news because some important credit demand sectors are now out of repair and are
expanding. Continuation of the expansion of the broad measure of liquidity will mitigate against
the QE concept, as it suggests the economy is becoming less reliant on direct monetary easing.

Measured yr/yr, the broad measure of liquidity has increased by 4%. This is a marked improvement
over recent months, but is far below the +10 - 12% yr/yr readings observed when the broad
measure is robust. So, the patient has improved from severe to mild anemia.

The liquidation of the banking system's real estate portfolio from its 2009 peak is approaching
$400 bil. (10% of total) and real estate loan demand is now running an extraordinary $2 tril.
below the longer term trend -- phenomenal stuff.

Money Market Funds (MMFs)
In the wake of the Great Recession and crashed markets, total MMF footings rose from $2.9 tril
to a peak of $3.5 tril. by 5/09. Since then, the total MMF fund balance has been drawn down to
about $2.5 tril., which is below levels at the peak of the economic and stock market cycles.
Naturally, these balances can be drawn down further, but it may be wise to note that the MMF
system is far from being flush with cash to drive the markets, especially when you consider that
the real economy makes demands on the same balances. Going forward, the markets might be
more dependent on the creation of private sector credit for support. Such a development would
not be unusual, but it may well increase capital market exposure to greater financial leverage.