Private sector liquidity growth has been averaging around 5.5% yr/yr recently. This growth has
been sufficient to fund the real economy, especially given the low rate of inflation. Total
sector liquidity growth to include the Fed's balance sheet was up 7.5% yr/yr through Nov.
Funding requirements for the stock and bond markets continue to be supported by the excess
liquidity provided by the Fed. But note that the Fed's balance sheet is no longer growing and that
total financial sector liquidity expansion measured yr/yr is falling steadily and appreciably. The
Fed is thus tightening monetary policy with the tapering and now expiration of QE 3.
Paced by 10 % growth of business loans, the banking system's total loan book continues to
expand. However, system liquidity remains strong as the banks have been able to grow the
loan book as well as add to short term Treasury positions. My short term credit / supply
pressure gauge is firming up in favor of demand. The gauge is a mild +5.0 but has increased
sharply since late 2013, a fact that will not be lost on the rate hawks at the Fed.
My markets cash reserve indicator has reversed course since mid - 2014 and is now rising.
The action is mild so far, but it signals a bit more portfolio manager caution on equities in
recent months.
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