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 working.

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 below. 

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 markets.  

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 encouraging.

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.

--Greg

(253) 927-0998
greg.merrill@sasm.com
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Strategic Asset Management
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Tacoma WA 98402

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