GOIH Economic Analysis" Fed Funds Rate 200 Basis Points above T-Bills.

The Fed Funds Rate today is priced more than 200 basis points above the 90 day T-bill rate.

What does this tell us?

It tell us that large banks with excess reserves would rather invest the excess in cash rather than loan the money in the Fed Fund Market, i.e., interbank lending.

So why would a bank rather hold cash than loan money to another bank?

A bank would rather hold cash than lend, for the obvious reason, it feels the risk reward does not justify the lending. Fundamentally if a bank will not loan to another bank, then what chance does a consumer have in getting a loan from that bank, little if any.

What will be the effect on the economy if this continues?

The Fed can lower the Fed Funds rate which the market thinks it will to spur investment or do nothing and let the economy sink further into a hold.


Change in Bankruptcy Law.

About two years ago the consumer bankruptcy law was changed to almost prevent a consumer from changing off all of their debts. A consumer now must enter into chapter 13, repayment rather than a chapter 7 liquidation for consumer bills. This legislation foresaw the coming consumer crisis in foreclosures and the coming credit card crunch.

Now a consumer must hang on to their house even if they cannot afford to pay for it, where in the past they could walk away and start over.

Even if the Fed cuts the Fed Fund rate, what effect will this have on the consumer?

We see no effect on the consumer if the Fed cut the Fed Funds rate.

Why, because the consumer is tapped out of their main source of cash, their home equity and with wages increase flat, there is no new money to spend at the consumer level.


Case in point, see Wal-Mart, (NYSE:WMT), who has reported lower sales the last two quarters. Looking at a chart of WMT, on June 4, 2007 WMT closed at $51, on Aug. 20, 2007 WMT closed at $43, down more than 20% in two months, reflecting less spending by the low income sector of the economy.

The homebuilder sector was down graded today with loses in all of the publicly traded homebuilder stocks. This says there is no relieve in the short term for an increase in homebuilding.


GOIH's Economic Forecasting Unit is preparing an economic analysis of the effect of a slow down in homebuilding on the overall economy.

We feel we have identified a fundamental flaw in the mainstream economic analysis on where the economy is and where it is headed based on economic activity in the building sector.

GOIH Capital Markets prepared this article.