Email of the day on global liquidity:
Comment of the Day

February 27 2019

Commentary by Eoin Treacy

Email of the day on global liquidity:

The emphasis you have given to liquidity as a principal driver of equity markets is being vindicated as prices continue to rise despite slowing money supply.  See attached article from Mises.

Eoin Treacy's view

Thank you for this interesting article. Here is a section:

Money supply growth can often be a helpful measure of economic activity. During periods of economic boom, money supply tends to grow quickly as banks make more loans. Recessions, on the other hand, tend to be preceded by periods of falling money-supply growth.

Many factors contribute to these trends. In recent months, money supply growth — in both M2 and TMS — has likely been impacted by falling growth rates in real estate loans at commercial banks. In January, real estate loans grew 2.9 percent, year over year, which was a 49-month low. The demand for mortgage loans has softened as mortgage rates have risen. In January, the 30-year, fixed average mortgage rate reached 4.46 percent, which was down from November's recent high of 4.87. January 2018's average mortgage rate was much lower, however, coming in at 4.03 percent. 

The problem with relying on the expectation that bank loan growth is a reflection of economic activity is banks have been hindered in their ability to make loans because of the damage done to their balance sheets during the credit crisis. Instead of lending they have been lodging excess reserves at the Fed in return for a modest, but risk-free interest rate.

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