Fisher Investments Editorial Staff
US Economy

Training Wheels

By, 08/07/2009

Story Highlights:

  • As the global financial system continues recovering, central banks around the globe are examining their monetary stimulus programs to determine appropriate next steps.
  • The Fed will likely sunset some stimulative programs, but significant funds are still circulating, encouraging economic recovery.
  •  A healthier financial system, along with central banks ready to take action, bodes well for economic recovery.



Learning to ride a bike can result in some skinned knees—but training wheels can do the trick for a wobbly rider. The same can be said of our financial system. Unprecedented global monetary stimulus has Financials and credit markets, if not Tour de France-ready, at least wobbling less and looking sturdier. 


There are plenty of positives to cheer. Morgan Stanley announced it'll redeem $950 million in warrants held by the US Treasury since October. Less than the warrants may be worth—and a sign banks are back in the driver's seat, with balance sheets that are more fit. In addition, the Fed is beginning to weigh the ongoing necessity of a number of its programs introduced over the past year. At the very least, it appears TALF[1] could come to a natural close, as demand for cheap, emergency loans from the Fed has waned. A program that allocated $300 billion to buy Treasury bonds may likely face the same fate.


But the Fed has said it will remain flexible. And certainly, global money supply is hardly drying up. The Bank of England announced it's adding £50 billion to its existing £125 billion quantitative easing program. Similarly, the European Central Bank announced its policy council will hold its target rate at current historic lows, and the People's Bank of China committed to policy flexibility in the near future. Changes in money supply take time to be felt, but inherently hit capital markets first. And that tsunami of new money has plenty of force left to help drive this bull market.


While excess liquidity could eventually lead to inflation, the risk's still distant and by no means a foregone conclusion. And, like TALF, many of the Fed's (and other central banks') programs aimed at unlocking frozen credit markets have a natural shelf life. There'll be a time to test out riding on just two wheels. But until then, global monetary support bodes well for economic recovery down the road—and an ongoing bull market now.

[1] Term Asset-Backed-Securities Loan Facility



*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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