One affect of the recent market
dislocations has been the credit markets freezing up. After the
bankruptcy of Lehman Brothers, not knowing
who would fail next caused the credit markets to seize. This chart
of GE commercial paper 90 day rates is very instructive in showing how
short term funding for most of America's financial system just stopped
General Electric (GE) is one of the
highest rated private companies in the world. Other less credit
worthy borrowers saw their rates jump even further. As you can see commercial
paper rates are starting to go down again due to the policies described
The Federal Reserve has recently
responded to the freeze by dramatically increasing their lending to banks
and now companies directly. As you can see below the absolute
change in credit supplied is impressive. Just today the Federal
Reserve announced another program to purchase commercial paper directly, disintermediating
banks completely and buying directly from corporations.
The U.S. Government is also recapitalizing
banks to reduce their leverage ratio and encourage them to start lending
to each other, corporations, and the general public.
This is the exact opposite
policy direction as compared to the Great Depression of the 1930's.
The money supply actually dropped and the failure rate amongst
banks was terrifyingly huge. As I have mentioned before I'm staying
alert to the possibility of all this extra money metastasizing into
inflation but right now it is just replacing scared money that has gone into
hiding. As long as the Federal Reserve shrinks their balance sheet
and thus reduces the money supply once the credit markets return to some semblance
of operation the inflationary risk is minimal.
This credit and equity storm onslaught
was impressive for both its speed and severity. The normal
information cycles of quarterly earnings reports and monthly economical
data reports were not frequent enough to reflect the damage
done. In my opinion this has exacerbated the panic in the
On a positive note the famous Warren Buffett
is buying stocks again.
I as well have been putting cash to work in both the debt and equity
markets recently. Reading Warren Buffett is doing the same is
I am hopeful the credit markets continue
to return to some semblance of normalcy. Only then can we see extent of
the damage. Until then both the stock and bond markets will be
nervous and prone to extreme moves in both directions. It makes
investing difficult but also presents opportunities.
If you have any questions or concerns please
feel free to contact me.