SPREAD ‘EM: The End of the Beginning or the Beginning of the End
Leave it to Meredith Whitney, Wall Street’s most outside-the-lines banking analyst, to stir the pot. Whitney argues in a Wall Street Journal op-ed today that the economy is not in recovery because credit is contracting. Specifically, Whitney highlights the contraction in credit to small businesses in the form of fewer loans, lines and credit cards.
The presumption behind her piece is that small businesses will continue to find credit in short supply. She writes:
The next phase will likely be credit-line cuts as lenders race to pre-emptively protect themselves from regulatory changes associated with the Credit Card Accountability, Responsibility and Disclosure Act, passed in May of this year, and the 2008 Unfair and Deceptive Acts and Practices Act.
I don’t see how she can make this presumption. A reduction in credit cards outstanding of another $1.5 trillion (according to Whitney, in the past two years, credit-card lines have been cut by over $1.25 trillion) assumes a constant rate of contraction, but why will that necessarily be the case? The big variable is credit spreads and investor demand on the capital markets. If investors bite at credit card-related fixed income products, then banks will slow the contraction in their credit card businesses — and might even reverse it. There is a HUGE amount of cash waiting on the sidelines of the capital markets. Actually, that’s not true. What is true is that there is a HUGE amount of cash that is coming off the capital-markets sidelines. We see that in credit spreads.
The TED spread largely remained below 20 last month, and rests today at 18.77.
TED SPREAD
The TED spread measures the difference between three-month Treasurys and the three-month Libor rate.
As for the Libor-OIS spread, which measures the difference between the three-month Libor rate and the anticipated average of the federal funds rate, it remains in good shape at 14 basis points.
LIBOR-OIS SPREAD
As long as credit spreads remain manageable, not to mention all the government money and risk support still in the market, credit investors are going to find it increasingly worthwhile to put their cash to work. And that slow march toward more demand for small business credit-related fixed income products means one thing: the availability of more small business credit. Someone tell Meredith to amend her financial models.
