Could Excess Liquidity Be Providing

Just after I joined TT in 2003 we had a robust discussion that lasted the better part of a weekend about the conditions that led to the stock market bubble in 2000. The consensus was that these conditions started in 1998 with the Russian currency crisis culminating with LTCM's 4.6bb loss and resolution that led market participants to speculate more aggressively, knowing that bailouts were now a part of the lexicon. On into 1999 and the infamous Y2K non-disaster. The common denominator for this year and a half stretch was lower interest rates and massive FED liquiduty adds. When you flood a financial system with that much cash/liquidity, bubbles are almost guaranteed. Rogerdodger has been posting a "Slosh Report" that I've found very interesting. It essentially provides a gross number to system liquidity.

"Slosh Report"

Other views of where some of this money comes from and where it goes can be found courtesy of the good folks at "Bulland BearWise.com".
1st, some of the FED money comes from bond sales out of it's SOMA account. (System Open Market Account Holdings) I don't think I've ever seen a drawdown as fast and large as this recent one.

SOMA Drawdowns

Over the last 3 months M2 has exploded. Money IS beginning to find it's way into general circulation.

Money Supply

Bottom line here is I don't see conditions as ripe as 2000 for a monster equity bubble, mainly because of the drag we're still experiencing from the bursting of the housing bubble, another fine mess we've gotten ourselves into. I do, however, think that this excess liquidity may make shorting the market very expensive and painful for quite some time to come. When the FED is in massive add mode, equity markets usually trade higher, regardless of the underlying reason for the adds in the first place. Could this time be different? Maybe. Will it be? IMO...no. "Don't Fade The FED" is probably the best advice I've ever gotten in life except for "never get into an automobile for ANY drive without using the bathroom first." Sage advice keeps us out of a lot of ditches.

U.F.O.

A backup to Roger's "Slosh Report". (Once again courtesy of BullandBearWise.com) If you haven't spent some time there, you haven't lived.

U.F.O.

Edited by U.F.O., 25 April 2008 - 10:01 PM.