Short of time today.

Are equities running upwards because of the money-flow effect of QE? I am sceptical about this idea. Think of it this way: money flow only means an increase in liquidity in the hands of real-money investors if those investors sell their bonds to the Fed; otherwise, it is banks that sell their bonds to the Fed. Thus, money flow is a factor if, and only if, real-money investors consider it a good idea to move out of bonds. In other words, it is the return expectations of real-money investors that are primary here, not the money flow.

Think about it in balance-sheet terms. If the Fed buys bonds from the banking system, it looks like this:

Fed
Assets: +bond
Liab: +excess reserves

Banks
Assets: -bond +excess reserves
Liab: NA

If the Fed buys bonds from a real-money investor (via a bank), it looks like this:

Fed
Assets: +bond
Liab: +excess reserves

Banks
Assets: +excess reserves
Liab: +deposits

Investors
Assets: -bond +deposits
Liab: NA

It is only in the latter case that new money is created. Of course, it might be that in the first case, banks decide to increase their lending to leveraged investors (this assumes that banks’ willingness to lend is a major constraint — which in the case of lending to leveraged financial players, it may be), but then, again, it is the banks’ expectations of the potential returns from such lending that is primary, not the money flow.

I think monetary policy in the US is maxed out, because expectations have already been raised as far as is possible by monetary policy alone. Why are equities running upwards, then? Because of the relatively good earnings season, which has raised investors’ expectations for the future.

Data notes: UK mortgage approvals continue to rise. Spanish GDP flash estimate was -0.7% QOQ for Q4, the worst since 2009 and the fifth straight quarter of decline. The US data for January continued to look relatively weak, with CB consumer confidence falling, d.e., but I am sceptical of the surveys because of the effect of shenanigans in Congress, which may have more of an effect on how people feel than on what they do. The Case-Shiller house price index continued its rising trend of YOY increases, posting a new post-crisis high for a YOY % change.

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