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Whenever investors begin to obsess over a particular factor and their anxieties start driving market prices, it's time to take a step back and assess whether the market's movements are justified by fundamentals.
When doing this exercise in the past, I've made my best calls on the markets, primarily because my macro approach forces me to look at the fundamentals of a given situation and gauge any disconnect between perceptions and reality. The goal is not necessarily to see whether the markets are wrong in terms of direction but to see whether their moves are excessive and unsustainable.
Right now, the hot topic is the subprime market. One of the biggest questions is whether this sector's problems will spill over into other areas of lending. In other words, will problems in the subprime market crimp overall lending and cause a credit crunch, which would then harm economic growth and potentially lead to a recession?
, I report regularly on a variety of data that answer the question of whether any credit crunch question is developing. For example, the nation's bank-lending statistics can either refute or validate the bears' concerns that the subprime woes will spread to other areas of lending and cause lending activity to flatten or weaken. Fortunately, these data are available on a weekly basis.
In looking to answer the credit-crunch question, I closely follow data released every Friday at 4:15 p.m. ET by the
on the assets and liabilities of U.S. commercial banks. I've been reporting on them for a long time, mostly to assess the pace of economic growth, but I changed my focus when the credit-crunch question started to garner more attention.
These data are an excellent gauge of whether any change in lending conditions is occurring. In this report, the Fed sums up the total amount of money extended by the nation's commercial banks to individuals, businesses and government entities via loans, leases and securities purchases. The data are comprehensive, meaning that if the problems in the subprime sector are broadening out, this will be obvious in the data.
The newest data released Friday squash the idea that a credit crunch is developing in response to recent subprime problems. The Fed's data show that bank credit expanded strongly in the week ended March 7, increasing $23.9 billion to $8.437 trillion. The rise follows other large gains over the previous five weeks, which saw bank credit expand at a 13% annual rate, which is faster than last year's gain of 11% and 2005's gain of 10%.
Interestingly, recent increases in bank credit have been partly the result of steady increases in real estate loans, which reached a record $3.381 trillion in the latest week.
In addition to these data, it is notable that bond issuance has been very robust over the past two weeks, with issuance running several times the normal levels. Hence, many entities are looking for money (many of these have been financial companies), and investors have been very willing to give it to them.
This wouldn't happen if there were a credit crunch. For now, that concept is still a sham.
Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic,
The Money Market
, first published in 1978 by Marcia Stigum, and
The Strategic Bond Investor
. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback;
to send him an email.
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