Federal Reserve Q1 2007 Z.1 “flow of funds” report.
The latest Federal Reserve Z.1 Report provides its usual interesting and illuminating “read”. At $3.607, Total SAAR (Seasonally-Adjusted and Annualized Rates) Credit Market Borrowings remain enormous - although somewhat slower than Q4’s SAAR $3.820 TN growth. For perspective, 2004 was the first year total borrowings surpassed $3.0 Trillion, with total borrowings averaging $2.292 TN annually during the decade 1996 to 2005. Total borrowings increased $3.706 TN during 2006, $3.463 TN in ’05, $3.232 TN in ’04, $2.896 TN in ’03, $2.495 TN in ’02, and $2.263 TN in ‘03. The trend of accelerating Credit expansion is unmistakable and, despite the housing slowdown, there’s a legitimate possibility it runs through 2007.
Continuing last year’s trend, Non-Financial Debt growth further moderated, while immoderate Financial Sector expansion gained additional momentum. Most analysts are focused on the slowdown in Non-Financial Debt and its negative economic implications. I’ll instead suggest that the historic financial sector expansion is the predominant dynamic. At this point, sustaining this runaway Credit expansion will be no easy feat. Yet, as long as it perseveres, unstable financial markets will be buffeted by liquidity overkill - and the Bubble Economy will be further contorted by these unwieldy inflationary forces.
For the first quarter, Total Non-Financial Debt Growth slowed from Q4’s 8.2% to 7.3%, while Financial Sector Credit Market Borrowings jumped from a robust 8.1% rate to a booming 9.3%. In nominal (SAAR) dollars, Non-Financial Debt growth slowed to $2.084 TN from Q4’s $2.304 TN rate, while Financial Sector Borrowing jumped to $1.354 TN from Q4’s $1.166 TN. And do keep in mind the mid-quarter subprime meltdown and market turbulence that for at least a few weeks threw some sand in the securities issuance gears.
Although slowing from last year’s blistering pace, Broker/Dealer Assets expanded SAAR $540bn, or about a 20% rate during the quarter, to $2.866 TN. For perspective, the Broker/Dealers expanded $615bn last year; $282bn in 2005; $232bn in 2004; $278bn in 2003; declined $130bn in 2002; and increased $244bn in 2001 and $220bn in 2000. Two-year Broker/Dealer growth increased to $919bn, or 47%. On the Asset side, Misc. Assets expanded at a 27% rate during the quarter to $1.664 TN, with a y-o-y gain of $619bn, or 25%. Credit Market Instruments expanded at a 30% rate, with y-o-y gains of $130bn, or 26%. Corporate Bond holdings grew at a 24% rate during the quarter, with a y-o-y gain of $68bn, or 19.8%.
The Liability Side of the Broker/Dealer balance sheet remains today a focal point of Macro Credit Analysis. Wall Street-pioneered innovation has profoundly altered contemporary “money” and Credit. Clearly, the traditional expansion of Deposit Liabilities - during the process of banking sector (loan) expansion – some time back lost its role as the primary source of system liquidity creation. As analysts, we must take a broad view of financial expansion and examine a wide range of financial sector liabilities created in the process lending as well as securities leveraging.
The Broker/Dealer Liability “Repurchase Agreements” (“repos”) expanded SAAR $372bn (in nominal dollars - 29.3% annualized) during the first quarter to $1.150TN. “Repo” Liabilities jumped $333bn, or 40.8%, over the past year and have doubled in about two years. The Liability “Security Credit” increased $30.2bn, or at a 12.6% rate during the quarter, with a one-year gain of $132bn, or 15.5%, to $988bn. The Liability “Due to Affiliate” was little changed during the quarter at $1.132 TN, with a y-o-y gain of $156bn, or 16.0%.
The Fed’s Z.1 category “Funding Corporations” – “Funding subsidiaries, non-bank financial holding companies, and custodial accounts for reinvested collateral of securities lending operations.” – Assets expanded a notable SAAR $498bn during the quarter to $2.199 TN. Funding Corp Assets were up $299bn y-o-y, with a 2-year gain of $596bn, or 37.2%. At $929bn, “Investment in brokers and dealers” was the biggest Funding Corp Asset. Primarily, these Funding Corps are vehicles used in securities financing operations, including the reinvestment of short sale (debt and equity) proceeds. And, in large part, it would appear that the “liquidity” acquired from a shorting transaction flows back to the broker/dealer community where it finances asset growth (i.e. securities holdings, lending to hedge fund and other clients, and derivatives operations).
The category “Federal Funds and Security Repurchase Agreements” expanded at a robust SAAR $470bn during Q1 to $2.610 TN. Over the past year, “Fed Funds and Repos” expanded $483bn, or 22.7%, with a 2-year gain of $828bn, or 46.4%. For perspective as to the systemic scope of the “repo” boom, total Bank Credit expanded $722bn y-o-y. Banks ended the quarter with a net “Fed Funds and Repo” Liability of $1.284TN, now only somewhat larger than the Broker/Dealer’s $1.150 TN. For comparison, at the end of 2002 the Banks net “Fed Funds and repo” Liability of $902bn overshadowed the Broker/Dealers’ $344bn. Interestingly, Rest of World (ROW) holdings of “Fed Funds and Repos” expanded SAAR $717bn during the quarter to $1.141 TN, having increased 60% over the past five quarters. ROW holdings have increased from 7.6% of total (net) “Fed funds and Repos” at the end of year 2000 to 43.7% to end the first quarter.
The Money Market Fund complex is again playing a prominent role in the ongoing Credit expansion, more recently in helping finance the Wall Street/securities boom. Money Market Funds expanded SAAR $428bn during the quarter to $2.390 TN. Money Funds grew $376bn over the past year, or 18.7%, with a 2-yr gain of 30%.
The ongoing boom in Wall Street “structured finance” showed no sign of abating. “Agency- and GSE-backed Mortgage Pools” expanded SAAR $468bn during the quarter to $4.076 TN, double the fourth quarter’s pace to the strongest expansion in several years. This took one-year Agency MBS growth to a relatively robust $322bn, or 8.6%. This sector was bolstered by subprime woes and the resulting newfound appetite for perceived safer mortgage securities. At SAAR $604bn, the growth in Asset-backed Securities (ABS including "private-label" MBS) remained strong, although down from Q4’s record SAAR $749bn. ABS increased $673bn, or 18.7%, over the past year to $4.268 TN. ABS has ballooned 62% over the past nine quarters. While the boom in their guarantee business has returned, GSE balance sheets remain contained. Asset growth was about flat for the quarter at $2.839bn, with a one-year gain of $24bn, or 0.9%.
A conversion of a commercial bank to a thrift apparently reduced Bank Assets by about $100bn during the quarter, somewhat muddying the analytical waters. All in all, Bank Assets were about unchanged during the quarter at $10.193 TN. Bank Credit rose $26bn (1.2% annualized), reducing y-o-y Bank Credit growth to 9.4% (2-yr gain of 20%). Loans were little changed for the quarter at $6.109 TN. Mortgage assets actually declined by $24bn, offset by a $24bn increased in Corporate Bonds. On a year-on-year basis, Total Loans were up $582bn (10.5%); Mortgages $354bn (11.7%); and Corporate Bonds $94.5bn (13.3%).
On the Bank Liability side, Total Deposits expanded at a 6.4% rate to $6.113 TN, with a one-year gain of 9.1%. Bank net “repo” Liabilities expanded at a 14.2% clip to $1.284 TN, increasing y-o-y gains to 13.5%. Bank Credit Market Borrowings slowed sharply during the quarter to $17bn. Yet, over the past year borrowings jumped 21.2% to $1.015 TN. Miscellaneous Liabilities declined $29bn during the quarter to $1.782 TN (up 3.6% y-o-y).
The historic Wall Street securities boom coupled with significantly slower mortgage Credit growth has taken the pressure off of bank Credit to sustain Bubble excess. Total Mortgage Debt (TMD) expanded SAAR $954bn during the first quarter, down from Q4’s $1.101 TN, Q3’s $1.242 TN, Q2’s $1.236 TN, and Q1 2006’s $1.318 TN. Yet keep in mind that TMD, on average, expanded $267bn annually during the nineties. Indeed, it is likely that 2007 will compete with $2003’s $1.00 TN for the fourth largest annual increasing in TMD (trailing only 2004-2006). And while Household Mortgage Debt growth slowed to a 6.2% pace, Commercial Mortgage debt growth remained in the low double digits. Over the past year, Home Mortgages increased 8.4% to $10.426bn and Commercial Mortgages jumped 13.9% to $2.261 TN. In two years, Home Mortgages increased 24% and Commercial 31%. Home Mortgages have now increased 114% in seven years.
Examining other non-bank sectors, Life Insurance Assets grew at a 5.8% rate during the quarter to $4.764 TN. Savings Institution Assets gained at a 1.6% rate to $1.667 TN. Real Estate Investment Trust Assets expanded at an 8.5% pace to $412bn (up 19.2% y-o-y). Finance Company Assets were little changed at $1.889 TN (up 1.9% y-o-y). Credit Unions expanded at a 13.9% rate to $741bn (up 5.4% y-o-y). It’s too bad there are not categories for hedge funds and CDOs.
Despite the moderation of both Non-Financial Debt and economic growth, there was little letup in the Rest of World accumulation of U.S. financial assets (not surprising, considering the boom in financial sector growth/liquidity creation). For the quarter, ROW increased U.S. asset holdings to the amazing tune of SAAR $1.316 TN to $12.931 TN, down only slightly from Q4’s SAAR $1.327 TN. In just 13 quarters, ROW holdings of U.S. financial assets ballooned $4.343 TN, or 51%.
During the first quarter, the ROW accumulation of Credit Market Instruments actually accelerated to SAAR $1.041 TN (to $6.717TN), with Treasuries increasing SAAR $364bn (to $2.219TN); Agencies SAAR $174bn; and Corporate Bonds SAAR $436bn. ROW purchased more Treasuries during the quarter than were issued (SAAR $326bn), about 30% of Agencies issued (SAAR $516bn) and 40% of new Corporate Bonds (SAAR $1.003TN). Over the past year, ROW Credit Market holdings increased $892bn, or 15.3%. During this period, Treasury holdings swelled $193bn (9.5%); Agency $204bn (20%); and Corporate Bonds (including ABS) $442bn (18.3%). As mentioned above, the ROW “repo” holding jumped SAAR $717bn during the quarter, offsetting a SAAR $528bn decrease in “Net Interbank Assets”.
And, as always, we’ll attempt to glean Credit Bubble insights from the (ballooning) Household (including non-profits) Balance Sheet. For the quarter, Household Assets increased $725bn (4.2% annualized) to $69.608 TN. Real Estate Assets increased $212bn (a 3.7% rate) and Financial Assets jumped $463bn (4.4% rate) to $42.522 TN. And with Liabilities increasing “only” $137bn during the quarter, Household Net Worth rose a respectable $587bn to $56.176 TN. For the year, Household Asset gains of $3.914 TN (6.0%) were offset by Liability increases of $1.002 TN (8.1%), leaving a $2.912 TN (5.5%) rise in Net Worth. Over four years, Assets inflated $21.157 TN (44%); Liabilities $4.604 TN (52%); and Net Worth $16.552 TN (42%). We should not understate the ongoing influence on consumer behavior from the spectacular (4-year plus) inflationary windfall.
The windfall is also lining government coffers. Federal Government first quarter Receipts were up 6.9% from the year ago period, with State & Local Receipts gaining 4.6%. First quarter spending was up a robust 6.0% at the federal level and 7.6% locally. Despite booming tax receipts, federal government borrowings increased at a 6.6% rate during the quarter (after growing 3.9% during 2006). State & Local debt expanded at an 8.6% rate (after 2006’s 8.2%).