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Five Things You Don't Want To Know


The following may be REALLY, REALLY SCARY. Also, possibly wrong, but still, REALLY SCARY.


Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:


1. Why 1% is Scary?
2. Scared Consumers Without a Cushion
3. S&P 500 Price Structure: More Scarily Bearish Than Previously Expected
4. Revisiting Scary 2002
5. The New, Scarier 2009

Why 1% is Scary?

On Wednesday, October 29, the Federal Reserve aggressively cut their target for the Federal Funds rate, the rate banks charge one another for overnight lending, to 1%, the lowest since 2003.

Why is that so scary? Well, let's consider a few things that were happening in 2003, the last time the Federal Reserve cut rates to such an aggressively low level.

By June 25, 2003, the Federal Reserve had cut interest 13 times, from 6.5% in as of January 2001 to 1%. Today, the Fed has cut rates nine times, from 5.25% in September 2007 to 1%.

But there are a number of key differences. For one thing, the deflationary forces that are in effect are far more severe right now than they were in 2003.

Commodities: From the first interest rate cut in January 2001 to June 2003, the CRB Index was up 3.4%.

From the first interest rate cut in September 2007 to present, the CRB Index is down 11%. Year-to-date, it is down 23%.

Credit: By virtually any measure, the Fed's interest rate policy was successfully resulting in real economic credit expansion throughout 2003.

According to the Fed's Senior Loan Officer Survey in April, 2003, "Only 6 percent of domestic banks reported that they had tightened standards on residential mortgage loans in the April survey, down from about 10 percent in both the January and the October surveys."

Meanwhile, as we are all painfully aware, the most recent Senior Loan Officer Survey from July 2008, "Large majorities of domestic respondents reported having tightened their lending standards on prime, nontraditional, and subprime residential mortgages over the previous three months. About 75 percent of domestic respondents-up from about 60 percent in the previous survey-indicated that they had tightened their lending standards on prime mortgages.2 Of the 32 respondents that originated nontraditional residential mortgage loans, about 85 percent-up from about 75 percent in the April survey-reported having tightened their lending standards on such loans.3 Finally, 6 of the 7 respondents that originated subprime mortgage loans-a somewhat higher proportion than in the April survey-indicated that they had tightened their lending standards on those loans over the past three months."

The charts from the most recent survey illustrate the difference in credit expansion from both the supply side (credit availability) and the demand side (credit appetite) at present, compared to 2003.

Percent tightening standards for C&I loans was dropping dramatically by the time the Fed reached 1% on the Fed Funds rate...


Meanwhile, demand for C&I loans had bottomed out in 2001 and by June 2003 was showing robust demand...


Commercial Real Estate lending standards had loosened considerably by 2003, while today it is not yet clear tighter standards have even peaked...


And note the tighter standards for consumer loans. Those standards throughout 2001-2003 were coming down even after having been well within range of historic norms, while present shows how tight credit availability is in the real economy...


Finally, most damning of all might be the reported credit demand. Remember, the Fed can lead them to water, but it can't make them drink...


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