The FED & Liquidity...The markets are getting thirsty
By Dr. Irwin Kellner, CBS MarketWatch
Last Update: 2:42 PM ET Aug 7, 2000
NEW YORK (CBS.MW) -- While investors are obsessing over whether or
not the Federal Reserve will raise interest rates later this month, they may
be missing something even more important -- a surreptitious withdrawal of
liquidity from the system by the central bank.
In the final analysis, growth in the supply of money
and credit has as much to do with the economy's
ability to grow as the level of interest rates -- if not
more.
It certainly has a lot to do with how much money is
available to go into the stock market.
Toward the end of last year, the Fed pumped up the
money supply well above seasonal needs, fearing
Y2K-related withdrawals at the nation's banks. The
money supply M-3 expanded by an annual rate of 11
percent -- one-third faster than gross domestic
product growth during the fourth quarter.
This reflected an increase in the monetary base of
16.3 percent, year-over-year.
Not surprisingly, the stock market ended the year on
a high note; the Dow Jones Industrials jumped 25
percent in 1999, while the Standard & Poors 500
rose almost 20 percent.
Markets quickly feel effect of monetary
strings
After New Year's, when it became clear that everything was copasetic, the
Fed began to withdraw this excess liquidity and in short order, the markets
began to feel the effects.
The Dow Jones Industrials peaked on Jan. 14; the Nasdaq Composite on
March 24.
If the monetary base is any guide, don't expect stocks to retest these highs
anytime soon. In the past four months, the base has been flat -- and well
below January's levels.
Year-over-year, the monetary base is now up less than 7 percent. The last
time it grew this slowly the Nasdaq was well below 2000.
All of this argues for keeping your eye on the right target, if you want to be
a successful investor.
What Alan Greenspan says is important -- up to a point. Remember, he's
the one who says he has "learned to mumble with great coherence," when it
comes to discussing monetary policy.
I prefer to put it another way. Watch what they do -- not what they say.
cbs.marketwatch.com |
