Reflation in Danger Due to Low Liquidity

Over the past few weeks we have expressed scepticism on the Trump reflation trade and
we have argued that bank stocks should underperform. We have shown previously that
when you look at the 3 and 6 month change in Commercial & Industrial lending as well as
the change in bank assets, these have ground to a standstill. Normally such declines have
corresponded with recessions. (We’re not calling for a recession and rely on our models.)

Worryingly, we are also seeing real M1 growth slow, and the 6 month change has now turned slightly negative. The six month change in real M2 is now the lowest since 2011. The poorer liquidity backdrop for broad and narrow money will represent a headwind to economic growth, risk assets and specifically bank stocks, which we recommend as shorts.  (Click on image to enlarge.)