Roll Over or Die
This posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.
Well, yet another apocalyptic week has passed on the markets, and the global financial system still appears to have enough life in it to allow for the possibility of more of the same in the weeks ahead. The week has ended with Congress passing, and President Bush signing, the revised revision of the Troubled Asset Relief Program. The bill’s passage, however, prospects of which had sustained market advances Friday, could not prevent significant falls on all major US indices by the closing bell on Friday. This is because of two things: first, horrible economic data continued to pour in, with the all-important monthly jobs report for September showing a loss of some 150,000 jobs, far more than was forecast. On top of this the US service sector put in a poor, if slightly positive performance, magnifying concerns about severe economic slowdown given the horrific reports on manufacturing activity and consumer spending that came out earlier in the week.
Second and more significantly, though, it is becoming clear that investors are more concerned about the the breakdown of the commercial paper and interbank markets than they are about the various fixes proposed to get them going again. As well they might be. Commercial paper basically consists of short-term bonds issued by companies to meet working capital outlays, including payroll and rent. These loans tend to be for very short periods, and require frequent rollovers, which was no problem in the days before banks started hoarding cash to cover potential losses they couldn’t even trace in their books, and money market funds started to become suspect (inasmuch as they invested in some other short-term securities, like, you guessed it, subprime loans, and started to “break the buck”, or hold less than they took in from investors). Now, of course, these problems are so great that even huge multinational firms, like GE, are having trouble raising money in the commercial paper market. If this continues, even for a short time, lots of vendors–and even possibly employees–will not be able to be paid. And while GE can borrow for very short periods, other smaller firms are finding it virtually impossible to raise money at all. And this is for working capital requirements: this point cannot be emphasised enough. If this thing shuts down and stays down, the macroeconomic impact will be vast, horrific and extremely sudden.
Needless to say, the, the bill’s passage didn’t do much to sooth the CP market, or the interbank market (which deals with banks lending amongst themselves)–the latter rate actually rose. The markets clearly think the TARP package is too little, too late, at least right now: we’ll see what happens next week. But the situation right now is extremely dire, and there isn’t much time to get it sorted before, as I noted above, the propect of lots of ordinary people not gettting paid will become a real possibility. And consumer spending, which accounts for a rather bloated 70% of the US economy, is already hitting the skids, and will, regardless of what happens in the CP market, probably take a big hit due to increasing credit card defaults (and that’s on top of the bad mortgage situation…).
Oh-before I forget: Governor Schwarzenneger of California, the largest state economy in the country (and still fifth largest in the world?), has informed Washington that California, which is one of the states in which the subprime mania really got out of control, of $7 billion within weeks.
Finally, to end this post–and I could keep going on about alot of other things), the situation with hedge funds is contuing to deterioirate. Hedge funds has a horrible September, and while few of us have any sympathy for them class-wise, the fact that they are being forced to liquidate their positions so quickly to pay off investors who are heading for the exits (remember, these extremely wealthy investors or well-endowed pension and other–including other hedge–funds pay exorbitant fees and expect massive outperfomrance, and will not tolerate for long the kind of losses so many of the funds are now suffering) means that equities, particularly in financial firms, will continue to be pressured. And that means they’ll continue to hoard cash, regardless of the prospect of being able to sell their dud assets to the Fed. This thing has taken on a life of its own, like the proverbial monster.