Excess Liquidity Game Is Coming To An End

In his daily notes, Rosie looks at what is sure to cause a few sleepless nights to all trend chasers who believe that the trillions in excess liquidity will be there to forever prop up artificially high stock prices. News flash - it won't, and it has already started to contract aggressively, yet computers seem to have problems with pulling down St. Louis Fed time series in their quest to constantly front-run one another.

Below are the three main charts of money aggregate levels over the past three months. As one can see, M1, M2 and MZM have commenced contracting at an alarming rate, implying that sooner rather than later, PMs will be forced to take out that rusty calculator and do some good old fashioned portfolio rebalancing and relative value digging, as the Fed can only prop the stratospheric equity prices so high before everything comes crashing down.

Here is Rosenberg's direct quote:

It is interesting that the equity market has begun to wobble (fade last Friday’s rally on such low volume) because we have noticed that some key liquidity indicators are not behaving very well, all of a sudden. M1 fell 1.0% in the August 24th week and over the past four weeks is down at a 6.5% annual rate. M2 has contracted in each of the past four weeks too and over that time has slipped at a 12.2% annualized pace, which is a near-record decline. We see the same trend in the broad MZM money measure — off at a 15.8% annual rate over the past month. Bank credit also remains in a fundamental downtrend — contracting at an epic 9% annualized pace over the past four weeks.


So for the first time in the post-WWII era, we have deflation in credit, wages and rents, and from our lens this is a toxic brew that in the end will ensure that the focus on capital preservation and income orientation will be the winning strategy over a strict reliance on capital appreciation.

As a reminder, by fundamental value we mean something a little more tangible than "sentiment" which was the reason for JPM's earlier upgrade of GE which seems to be the driving force for most of today's stock moves (aside from Bernanke's crusade to destroy the dollar at all costs of course).

To end, here is another quote from Rosie which may explain much of the recent ebulience in the equity market:

In case you are wondering how it is that the housing market has suddenly sprung back, it’s because the era of free money is back, courtesy of the benevolent U.S. government. The FHA’s share of the mortgage market has ballooned from a residual 3.0% in 2006 to 23.0% currently as the government moves in to replace the private subprime lending industry. So now we are back to the thought process that insuring mortgages with a 3.5% down payment is a good thing for the economy — little surprise that the FHA delinquency rate has soared to nearly 8.0% from 5.4% a year ago, and the taxpayer is on the hook. How is it that there is no public outrage for a government policy of giving another shot of scotch to the drunken sailor is totally beyond our comprehension.