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Thursday, June 25, 2009


the fed and commercial paper

following on earlier comments -- via ft alphaville:

Of course, a lot of this is down to alternative facilities, like the Commercial Paper Funding Facility, provided by the Fed. Companies are issuing directly to the Fed’s SPV instead of traditional counterparties like money market funds. This is especially the case since Fed terms allow issuers to finance the repurchase of outstanding commercial paper by selling new paper to the SPV. ...

Last week, the overall market shrank by $27.7 billion. Over the past 3 months, the commercial paper market has seen dramatic contractions. Demand for funds from companies has dropped, while the Federal Deposit Insurance Corp. program guaranteeing longer-term debt has provided some companies with a viable funding alternative. The bulk of the shrinkage this week is in the asset-backed portion of the market. It saw a decline of $21.3 billion this week, after a decline of $22.2 billion last week. The Fed set up the Commercial Paper Funding Facility in October to extend short-term financing to U.S. companies that had been shut out of the commercial paper market. Later Thursday, the bank will release data on how much it holds in its program.

The only thing is, the Fed’s June report on the uptake of its credit and liquidity programs contradicts the above line. It described a decline in the use of its Commercial Paper Funding Facility thus:

Recent Developments • A significant portion of maturing paper in the CPFF over recent weeks has not been rolled over. • Improvements in market conditions may have allowed some borrowers to obtain financing from private investors in the commercial paper market or from other sources.

So what does it mean if companies are not tapping either the market or the Fed for short-term liquidity?

Dow Jones suggests the shrinking economy has translated into fewer spending needs and lower overheads. But that would be extremely effective cost-cutting by companies. We, on the other hand, presume a shrinking economy can seriously hinder cashflow due to invoice payment delays, upping the need for accessibility to short-term cash.

i think the answer is that the vehicles which were financed by commercial paper -- which prominently include mortgage, auto and credit card financing -- are being wound down to the detriment of outstanding consumer credit in advance of being forced back onto bank balance sheets. see alphaville on meredith whitney:

Record credit card losses are pushing big US banks to come to the rescue of off-balance sheet vehicles they use to transform hundreds of billions of dollars in consumer loans into securities sold to investors. The support provided by Citigroup, Bank of America, JPMorgan Chase and American Express underscores how the deteriorating health of the US consumer is opening new fronts in the financial crisis.

this would in part explain why early consumer results for june have been so poor. a fearful combination of bank anticipation of funding problems and consumer balance sheet repair.

alea linked to dean popplewell's forex blog today, where he provided this commentary on yesterday's FOMC comments:

Bernanke and Co. came and delivered what was expected. No real surprises, the FOMC communiqué was probably more on the hawkish side (how else will they influence the most important variable-the consumer). Positives, policy members believe that businesses have pared inventories to levels better ‘aligned with sales’. Inventories have been the scourge of this recession. Any drawdown of stocks must be seen as a positive! On the inflation front, they mention commodity prices, however, the feeling is they are not that concerned (bang goes the exit strategy!). One note, they said that will ‘make adjustments to credit and liquidity programs as warranted’. Analysts interpret this as an indication that they might raise the rate on TAF and perhaps the discount rate to encourage further wind down of these programs which could be the 1st-step for an exit strategy.

and further on durable goods, which were yesterday's upside surprise:

The May data still leave the 3-month annualized growth rate for core-orders at -13.5% vs. 1st Q decline of -44%. Analysts note that a flat June reading would push 2nd Q growth into positive territory. Digging deeper, core-shipments were down -24% over the last 3-months. For the naysayers, firstly, the upbeat headline may be driven by foreign orders rather than domestic strength. Proof may be seen in May’s ISM manufacturing index foreign orders component which posted some improvement. Secondly, markets continue to deal with ‘rabid’ volatility off of a very low order mark and of course this will exaggerate any series of data. Thirdly, the durable goods inventory-to-sales ratio now stands at its highest level in nearly 2-decades (manufactures are bullish on the future-but it’s the consumer we are concerned about) and finally, not for any bull to enjoy, aircraft orders are a huge headline factor in the report and could easily reversed next month!

the fed is hinting at an intention to get its alphabet soup under control if not off the balance sheet -- large banks are anticipating having to fund a new flight of failed consumer-credit SPVs, even as they furiously retract -- and the consumer is so weak that even the huge drawdown in durable goods orders and shipments has left inventory-to-sales at record levels, with predictable effect upon retailers. this is very scary indeed, pointing directly to an aggravated two-part credit crunch and i think perhaps a more difficult second-half path ahead than is generally being discounted.

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Some good points, Gaius. The US government (and others) have been good at pumping out more spending, but it's not clear if it's doing anything other than delaying a collapse in asset prices--do you follow how much the federal withholding taxes are down Y-O-Y (about 9% this quarter)? Part of this is because the federal government isn't really very good at spending new money(seriously).
The stimulus would be much more effective if it just gave everyone $10,000 (or forewent 10% of taxes, if you prefer).

We can, of course, keep extending and pretending, but this too has its cost. High RE and other asset prices have the effect of stifling new business and enterprises that would create jobs and exports. The inability to take losses will strangle growth and encourage middle-class people to search out "safe" employment--which now means either health care, education, or government. The problem is that none of these areas produce anything that the rest of the world needs (or, in the case of prescription drugs, is willing to pay for).

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