Consumer spending, liquidity and asset prices

Yesterday's fall in US consumer credit notwithstanding, it may still be too early to write off the US consumer. Reuters reports:

Investor's Business Daily and TechnoMetrica Market Intelligence said their economic optimism index rose to 48.6 from 42.0 in October, as the effect on sentiment from recent hurricanes waned... In a promising sign for the upcoming holiday shopping season, the six-month outlook measure surged 10.3 points to 40.2. The personal financial outlook climbed 4.6 points to 57.9.

And actual spending is holding up too, according to another Reuters report:

Sales in November to date were up 0.5 percent compared with the same period in October, while sales at major retailers rose by 4.2 percent on a year-over-year basis for the week ended November 5, said Redbook Research, an independent company.

And the UK consumer isn't doing too badly either, despite the retail industry's fears.

The British Retail Consortium said like-for-like sales fell 0.2 percent last month, their best year-on-year performance since March... Total sales, which include new floorspace, rose 3.7 percent. That was the sixth consecutive month of annual increases and the strongest increase since March.

This despite weak consumer confidence.

Mortgage lender Nationwide said its consumer confidence index fell to 92 points in October from a low of 94 hit the month before. That was the lowest since the survey began in May 2004. The index has lost 18 points since peaking at 110 in February... The spending sub-index improved to 112 points, with the proportion of people who think now is a good time to make a big purchase as well as those who think it is a good time to make a household purchase both inching up.

No doubt, cheap money helps fuel spending. Morgan Stanley's Joachim Fels thinks that global excess liquidity will continue to expand and sustain asset prices as well.

[D]espite the Fed’s rate hikes since June 2004, which have led to a slight decline in excess liquidity in the US and China this year (on the narrow money-to-GDP measure) global excess liquidity has become even more abundant this year. Global narrow money growth outpaced global nominal GDP growth by 1.4 percentage points (pp), broad money growth outpaced GDP by 2.7 pp, and credit growth outpaced GDP by 3.6 pp. The main reason was a significant increase in excess liquidity in the euro area on all three measures. Thus, it is fair to say that the ECB has become the main financier of global asset price inflation this year...

Global excess liquidity is alive and kicking, read: still expanding. Aggressive central bank rate hikes to mop up excessive liquidity -- and that's what would be needed to make a meaningful difference to the high levels accumulated -- are unlikely, in my view... So, excess liquidity will likely stay around, cushioning the bear market in government bonds, credit and high yield that I think has started or is about to start. And as the liquidity has to go somewhere, my guess is that the next bubble could well occur in equities, the least overvalued of all major asset classes, in my view.