Stocks staged a strong advance on speculation of European central bank bond buying, strong earnings and speculation the Federal Reserve will boost stimulus if growth slows.
Will growth slow? Many times I have referenced monetary velocity, or the turnover of money. Such velocity is at record low levels, partially the function of the massive amount of liquidity the Federal Reserve has provided via the expansion of its balance sheet to $4.3 trillion up $3.8 trillion from 2008.
Recent Federal Reserve data indicates the level of bank loans outstanding is now at a six year high, back above its pre-crisis peak. The past five months there has been a robust pick up of nearly every category of loans thus suggesting third quarter nominal GDP should be strong. Initial estimates of third quarter GDP is released next week following the FOMC meeting.
I rhetorically ask at what rate would the economy expand if monetary velocity moved from its record low pace of 4.4x to its historical average of 17.2x? Wow! Talk about an economic boom that would cause exceedingly strong demand pull inflationary pressures.
Cash levels are an indicator of confidence. The Fed could hypothetically provide more stimuli that would increase liquidity, but without confidence this liquidity will produce little economic benefit. Unfortunately the FOMC cannot increase confidence levels. Such levels can only increase if all feel more optimistic about tomorrow, optimism inspired by unifying leadership.
Will such an environment arise in two weeks?
Today the CPI is released and such is expected to be benign. There are also a host of earnings announcements. Similar to earnings, will revenues continue to exceed expectations?
Last night the foreign markets were up. London was up 0.17%, Paris up 0.21% and Frankfurt up 0.32%. Japan was up 2.64% and Hang Sang up 1.37%.
The Dow should open quietly lower as many are pondering last week’s mantra of a weakening global economy and its impact upon earnings. The 10-year is up 10/32 to yield 2.19%.