From raw to thaw

Believe it or not, the economic downturn is starting to show signs of abating. Amen! Specifically I am referring to the following encouraging signs:

• The London Inter Bank Offering Rate (alias LIBOR) has fallen to 1.2% from an October high of 4.8%. This is the rate that banks charge each other when they borrow from one another. Banks have “ready reserve” requirements that they must meet each night in order to conform to regulatory standards. In other words, they have to keep a certain amount of cash/funds on hand in order to stay within the bounds of the law. These monies are usually just borrowed overnight until a new wave of deposits or other fund sources come to a bank short of its reserve requirements. Obviously an overnight loan shouldn’t be considered too risky. But because of the massive financial institution problems of 2008 (see Lehman Brothers and Washington Mutual) banks were extraordinarily nervous as to whether or not they would get their loans paid back…even overnight. Yikes! However, the 75% fall in the rate that banks charge each other for these kind of loans is a strong sign that the credit markets are starting to loosen.
• Many businesses with solid credit ratings are raising a lot of debt capital; $264 billion in the 6 weeks of 2009, or $44 billion each week to be exact. This total compares to the entire 4th quarter’s paltry $249 billion, or $2.7 billion per week. This is clearly a strong sign that investors are ready to “make some money,” even if that money is a very conservative rate of return given the low interest rates being offered by high credit quality lenders. But nonetheless there is a rebuilding of trust between lenders and borrowers that is a positive sign of the amelioration of the fear that gripped credit markets last year. The issuance of debt capital by businesses is also a positive sign in that it shows that businesses are behaving rationally. When interest rates are low you raise as much capital as you can to refinance old debts (this raises profits immediately), or because you have new projects that need money in order to move forward (this raises profits long-term).
• Businesses are borrowing less from a special Federal Reserve fund that was established to serve the short-term commercial credit markets. And the interest rates on these types of transaction have come down.
• Measures of business and consumer confidence, while still hovering around record lows, are stabilizing.
• As I said yesterday, the stock market has been trading within a narrow range since November. But more importantly, it is now discounting news and not emotion.

All of these are positive signs. Additionally, the governments around the world have tacitly stated that they will underwrite the cost of economic recovery. The point is that things appear to be bottoming out. And again, I encourage you to invest if you have the capacity to invest.

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I am headed to Mexico for a week and will likely be incognito. I hope that you are continuing to enjoy the blog and that it is useful to you.

With a smile sent your way!

Jason