Financial System Liquidity

The end of the Fed's QE programs did hamper the economy and the stock market for a while, but
the view here was always that if private sector funding responded positively, the economy and the
market would be OK. Strangely, the US is now moving on quite a different plane. There is clearly
sufficient liquidity to fund economic expansion and rising capital markets. The surprise has been
the steady rise in private sector liquidity preference. Historically, as an economic expansion
matures, the basic money supply adjusted for inflation tends to flatten out and occasionally go
negative as consumers and businesses run higher spending budgets. But here we are with real M-1
up nearly 7% y/y on miniscule short rates. In a like manner, my short term credit supply / demand
pressure gauge would now be running strongly positive as banks hustled to meet rising loan
demand from business. Not this time out. The gauge now sits at a -5.4, which is more indicative
of recession or the initial stage of an economic recovery. With folks more interested in holding on
to their money, one outcome is that there is now a built-in tendency for the economy to grow rather
slowly and for inflation to remain subdued. There are unusual circumstances, too. Business
inventories are continuing to run on the high side, and the Trump /GOP threat to repeal ACA and
replace it with a stingier health plan has up to 50 million consumers worried about losing coverage
or paying higher premiums. This dumb, drawn out saga is leading people to defer spending and
build liquid kitties instead.

This strong contra-move in favor of liquidity preference by the private sector provides funds to
support the markets at present, but if it continues, it will eventually imperil the economy or keep it
running at stall speed.

Investor confidence is high, but it would be nice to see stronger business and consumer confidence.