The views expressed in this column are those of the author and not SVB Financial Group.
Gimme some water…
Cool cool water
- Eddie Money
The Basel Committee on Bank Supervision launched a new siphon hose into the kiddie pool last week in the form of several new recommendations on bank capital requirements.
As seemingly permanent residents of this shallowest of pools in the investment world, we are becoming increasingly concerned about the supply/demand balance for short, high quality cash investments. Not only have there been multiple assaults on our sector from imprudent investment vehicles (auction rates, extendible commercial paper, SIVs, etc.), but now regulators seem to be attacking the staples of this arena: financial sector commercial paper and corporate bonds.
Looking at demand, there are both technical and regulatory-induced imbalances. On the technical side, many investors are simply scared and so we have the typical residents from the deep and shallow ends of the pool crammed into the kiddie pool with us. These folks have sharp elbows and no discrimination when it comes to yield.
Regulatory factors are important as well, including liquidity restrictions placed on money funds earlier this year that require they keep at least 10 percent of their assets rolling over weekly and 30 percent monthly. Considering this is a $2.8 trillion industry, these are not your typical skinny bathers. Bloated fund managers who already are restricted to a 13-month maximum are now crowding the shorter end of the yield curve, driving yields to all-time lows.
On the supply side, we have seen outstanding commercial paper drop from $2.2 trillion to just $1.0 trillion today. Typical issuers are flush with cash and many corporate issuers are locking in today's low rates by issuing longer-term bonds. Add to this, the recent Basel pronouncements limiting issuance of short-term debt for financial institutions and you can almost feel the water level dropping.
Certainly, as perceived risk recedes, we will see some of these swimmers tip-toeing back into (at least) the shallow end of the pool, but a widespread cannonball dive seems far into the future. Until then, we will have to continue bumping into these normally risk-seeking, pruned-fingered intruders who are used to swimming in the deep end while our kiddie pool continues to be drained of viable investment alternatives.
Our focus, of course, remains on capital preservation and liquidity over and above yield. Standing nearly still in the pool, we enjoy our contact with the water and fight vigorously for more than our fair share of it!
Key Developments August retail sales rose a stronger than expected 0.4 percent after rising 0.3 percent in July. Much of the strength came from gasoline and food stores while auto sales continued to disappoint. Overall, retail sales have recovered about half the drop experienced since late 2008.
The consumer and producer inflation measures for August came in at 0.3 percent and 0.4 percent respectively while the core measure, which strips out volatile food and energy components, was close to flat for the month. Over the last 12 months these measures remain quite low, including a core consumer price increase rate of 0.9 percent — one of the smallest in over 40 years.
The current account deficit in the second quarter increased $14.2 billion to $124.1 billion largely due to the deterioration in the trade balance for goods and services. As a percent of GDP, the current account deficit stands at 3.4 percent, up from 3.0 percent in the first quarter but down from an average of 4.7 percent in 2009.
The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or SVB Asset Management, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
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