Liquidity Factors

Finance sector commercial paper issuance in the US has
fallen from a historic peak of $2.2 tril. set in early Aug.
2007 to about $1.6 tril. currently, primarily reflecting the
collapse in the asset backed segment of the market. This
has shut off the yield spread funding of longer dated CDO
and other types of high risk long paper. For the past
six months, the broad measure of credit driven funding or
liquidity has grown at a 2.0% annual rate, compared to an
8.6% AR over Half 1'07. Since the commercial paper market has not
bottomed yet, we can look forward a little and say that the broad
measure of liquidity ($11 tril.+) is not growing fast enough to
sustain economic expansion and heavier trouble will result if
liquidity growth does not improve. the matter has been made more
pernicious by the fact that accelerated inflation has been
gobbling up what liquidity has appeared.

Viewed yr/yr, the matter is less dire, as liquidity has risen
about 6.5%. So there has been enough of a longer term tailwind
to sustain the economy, but that will run down with time.

With the new TAFs added in, Fed Bank lending to the banking
system is around $900 bil., up roughly 6.0% yr/yr, with the vast
bulk of this increase coming in recent weeks. This high powered
monetary liquidity plus the cuts to the FFR% form the base of the
Fed's plan to keep the economy growing and to encourage a step-up
in funding and lending by the banks. Under the best of cirumstances,
this will not work overnight and it's no small wonder the Fed has
pushed the prospect of faster economic growth out until the second
half of 2008.

Dry, arcane stuff you say? A clear 3-6 month window of uncertainty
you say? Right on both counts. Will the Fed have to do more?
Could well be they will. Were They too slow to act? Probably. Was
Their concern about inflation misplaced? Doesn't look so yet.

Measured yr/yr, the $ cost of production is up just about as much
as the broad measure of liquidity. This means no liquidity
tailwind for the capital markets and increased reliance on portfolio
cash and perhaps a new source -- the sovereign wealth fund.

On an annual basis, the US is now exporting about $120 bil. less in
$ through the trade window. This means you have to keep an extra
careful watch on the smaller less well developed countries that
have increased reliance on exporting to the US. Eastern Europe
comes to mind.