Federal Reserve Q3 2007 Z.1 “flow of funds” report.
I’ve been examining the Fed’s quarterly Z.1 “Flow of Funds” data for some time now; I can’t recall a report as intriguing as this one. In the face of mounting financial crisis, Total (non-financial and financial) Credit growth accelerated from Q2’s 8.6% pace to a remarkable 11.1% annualized rate. The rate of Non-Financial Debt growth increased to 8.9% from 7.2%. The pace of Corporate Borrowings rose to 11.0% from Q2’s 10.3%, while Household Mortgage Debt growth slowed to 6.8% from 8.0%. Federal Debt growth expanded at an 8.8% pace, up from Q2’s slight contraction. The booming State & Local sector cooled somewhat, with debt growth reduced to 8.4% from Q2’s 10.3%.
Importantly, Domestic Financial Sector borrowings expanded at an alarming 15.6% rate, up from Q2’s already overheated 9.8%. The Banking, Money Fund, GSE and agency-MBS sectors all accelerated, expanding at double-digit rates (more detail than you care to know below). Wall Street Finance abruptly hit the wall.
During the third quarter, Total Credit Market Borrowings (TCMB) increased at a record Seasonally-Adjusted and Annualized Rate (SAAR) of $4.989 TN to $47.864 TN. This was a significant acceleration from Q2’s $3.811 TN and compares to Q3 2006’s $3.448 TN. For perspective, growth in TCMB averaged $1.237 TN annually during the nineties. For the seven years 2000 through 2006, TCMB growth averaged $2.803 TN. Financial Sector Borrowings expanded at an unprecedented SAAR $2.321 TN during the quarter. This compares to a $494bn average during the nineties and the $981bn annually during the period 2000-2006. Total Credit Market Debt has now ballooned 20% in two years. Since the beginning of 2003, Total Debt has surged 50% - rising from 298% of GDP to 343% - in the greatest Credit Inflation in history.
With Wall Street finance under heightened stress, Bank Assets expanded a record SAAR $1.586 TN during the quarter, or a 16.2% rate to $10.873 TN. To put the scope of this ballooning into perspective, recall that Bank Assets increased a record $897bn during 2006, after expanding $763bn during ‘05, $762bn in ‘04 and $495bn during 2003. Bank Assets expanded, on average, $215bn annually during the nineties. For the third quarter on the Bank Asset side, Loans expanded a record SAAR $957bn, up from Q2’s $461bn and Q3 ‘06’s SAAR $411bn. In nominal dollars, Bank Loans expanded more during Q3 ($249bn) than they did for the entire year 2003 ($215bn). Bank Mortgage Loan growth slowed to SAAR $205bn (vs. Q2’s $266bn), while business Loan growth jumped to a record SAAR $561bn (vs. Q2’s 195bn). Bank Securities holdings were little changed, although the composition was altered markedly. Agency and GSE-MBS holdings declined SAAR $256bn, while Corporate & Foreign Bonds jumped SAAR $296bn.
How did the banking system finance this record expansion – or what (perceived “money”-like) Liabilities were created in the process? Total Deposits grew at a 12.3% pace during the quarter to $6.355 TN. Deposits were up $539bn, or 9.3%, over the past year. Credit Market Liabilities also increased markedly. The Liability “Other Loans & Advances” increased SAAR $332bn and Misc. Liabilities SAAR $437bn. During the past four quarters, Bank “Credit Market Liabilities” increased 31.5% to $1.184 TN, “Fed Funds & Repo” 11.5% to $1.351 TN, and Bond Liabilities 21.3% to $655bn.
Over the past year, Bank Assets have inflated $1.070 TN, or 10.9%. Mortgage loans have increased $333bn, or 10.5%. Business Loans were up $221bn, or 13.1%. Corporate Bond holdings gained $173bn, or 23%, and Misc. Assets grew $233bn, or 13.6%. Over two years, Banks Assets increased $17.7%, with Total Loans up 23.7%.
Breakneck Banking system expansion was matched by (non-Wall Street-backed) “structured finance.” In the face of faltering marketplace liquidity, GSE Assets expanded a record SAAR $617bn, or a 20.7% rate. This compares to 2006’s Asset growth of $61bn and 2005’s contraction of $64bn. GSE ballooning peaked at $344bn during 2001. In nominal dollars, the $154bn increase in GSE assets during Q3 surpassed even the $137bn increase during (the infamous LTCM reliquefication from) Q4 1998. The entire GSE expansion is explained by the unprecedented SAAR $759bn surge in Federal Home Loan Bank (FHLB) Loans & Advances. In nominal dollars, the $180bn Q3 increase in FHLB “Loans & Advances” amounted to a 112% growth rate, with y-o-y growth of 27.7% to $822bn.
Meanwhile, Agency (Fannie and Freddie guaranteed) MBS expanded a record SAAR $623bn to $4.26 TN during the quarter. For perspective, Agency MBS increased $295bn during 2006, $174bn during ’05, $63bn in ’04, and $331bn in ’03. In nominal dollars, MBS grew $168bn, or 16.4% annualized - increasing y-o-y growth to $475bn, or 12.6%. Booming Agency MBS issuance filled the huge void created by Wall Street’s faltering “private-label” mortgage and ABS marketplace. After expanding a cumulative $1.0 TN during the preceding six quarters, the ABS market abruptly ground to a halt during the summer, managing only a $2.4bn increase during Q3 (to $4.276 TN). This slowed y-o-y growth to $470bn, or 12.3%.
Also playing a pivotal role in Risk Intermediation during a tumultuous quarter, Money Market Fund Assets (MMFA) expanded at a remarkable 50% rate to $2.80 TN. It’s worth noting the composition of the growth in Assets. In SAAR dollars during the quarter, Foreign Deposits increased $130bn; Time & Savings Deposits $182bn; Security Repos $444bn; Treasury Securities $162bn; Agency & GSE MBS $128bn; and Municipal Securities $149bn.
MMFA ballooned $635bn over the past four quarters, or 29.3%. With the Money Fund complex now occupying such a critical position in the Credit Mechanism, we’ll take a closer-than-normal examination of fund Assets. Over the past year, Money Fund holdings of “Foreign Deposits” increased 45% to $102bn; “Time & Saving Deposits” 25% to $261bn; Security RPs” 38% to $507bn; “Open Market Paper” 20% to $666bn; “Treasury Securities” 79% to $128bn; “Agency- & GSE-backed Securities” 16% to $162bn; “Municipal Securities” 22% to $431bn; “Corporate & Foreign Bonds” 22% to $416bn; and “Miscellaneous” 113% to $124bn.
Despite all the market turmoil, Total Mortgage Debt (TMD) still mustered an 8.0% growth rate to $14.360 TN. In SAAR dollars, the $1.099 TN quarterly increase was down sharply from 2006’s record $1.409 TN, yet still surpassed 2003’s $996bn expansion. And keep in mind that TMD expanded $268bn annually during the nineties and surpassed $1.0 TN for the first time in 2004. It is also worth mentioning that Q2 mortgage debt growth was revised up to a curiously strong 9.6% rate. During Q3, Home Mortgage Debt (HMD) slowed from a Q2’s 8.3% to a 7.1% rate, while Commercial Mortgage Debt (CMD) cooled from a blistering 15% to a still hot 11%. Over the past year, HMD increased 7.9% to $11.028 TN and CMD 13.3% to $2.406 TN. Expect these numbers to come down significantly during Q4.
The securities Broker/Dealers saw their incredible boom hit the wall during the third quarter. After Q1’s 41% growth rate was followed by Q2’s 23%, growth tanked abruptly to less than 1% during the past quarter. Over the past year, Broker/Dealers Assets have expanded $616bn, or 23.8%, to $3.201 TN, fueled by a 37% increase in Credit Market Instruments (to $735bn) and a 24% increase in Misc. Assets (to $1.865TN). And while Total Assets were little changed during Q3, the composition certainly shifted. In nominal dollars, Agency & GSE MBS increased $72bn (to $195bn) and Treasuries gained $72.1bn (to negative $53bn), while Misc. Assets dropped $70bn (to $1.865TN) and Securities Credit declined $36bn (to $298bn). Corporate and Foreign Bonds were little changed at $467bn. On the Liability side, “Securities Repos” increased $55bn to $1.297 TN, with notable one-year growth of $333bn (34.6%). Over the past two years, Broker/Dealer assets have ballooned 51%, while Repo Liabilities have inflated 83%.
Funding Corp (“Funding subsidiaries, nonbank financial holding companies, and custodial accounts for reinvested collateral of securities lending operations”) assets expanded nominal $144bn during Q3, with y-o-y growth of 19% to $1.792 TN. “Fed Funds & Repo” expanded at a 6.9% rate during Q3 to $2.799 TN, with one-year growth of 18.2%. Finance Company Assets expanded at a 5.6% rate during the quarter to $1.924 TN and Savings Institutions a 12.9% rate to $1.759 TN; REITs contracted at an 8.2% rate to $607bn; Credit Unions expanded at a 0.6% rate to $748bn; and the Life Insurance sector grew at a 5.7% pace to $4.950 TN.
National Income was up 5.3% y-o-y to $12.307 TN during Q3, with Total Compensation rising 6.4% y-o-y to $7.917 TN. State & Local government Receipts held steady at up 5.1% y-o-y, while S&L Expenditures rose 6.2% y-o-y. Federal Receipts slowed, with Q3’s 7.0% y-o-y increase down from Q2’s 8.0%. Federal Expenditures were up 6.0% y-o-y. Expect both State & Local and federal government receipts to slow going forward.
The Household (and Non-Profit) Balance Sheet remains a key analytical focal point. Total Household Assets expanded at a 4.8% rate during the quarter to $72.761 TN. Household Liabilities increased at a stronger 6.7% rate to $14.157 TN. Yet in nominal dollars, Assets inflated $858bn and Liabilities increased “only” $234bn – leaving Household Net Worth up $625bn during the quarter to a record $58.604 TN. It is worth noting that the growth in Real Estate Assets slowed to only $119bn during Q3, while Credit Bubble excess inflated Household Financial Assets by $699bn. Over the past year, Household Assets inflated $5.039 TN (7.4%), with a $1.035 TN (7.9%) increase in Liabilities leaving a $4.004 TN (7.3%) increase in Net Worth to fuel the U.S. Bubble Economy. Declining Net Worth will have a significant restraining impact on consumption.
The Rest of World (ROW) expanded holdings of US Financial Assets increased by SAAR $1.132 TN during Q3 to $15.463 TN. This was a notable slowdown from Q2’s SAAR $2.507 TN and Q3 2006’s $1.928 TN, and is largely explained by a significant (and ominous) decline in the accumulation of US Credit Market Instruments. Still, ROW holdings increased $2.251 TN over the past year (17%) and almost doubled since the beginning of 2003. During the quarter, ROW holdings of “Security RPs” declined at SAAR $348bn and “Open Market Paper” declined SAAR $103bn. Treasury Securities increased SAAR $160bn and Agencies SAAR $155bn. And in a notable development, after increasing SAAR $457bn during Q1 and SAAR $443bn in Q2, holdings of U.S. Corporate Bonds (including ABS) reversed and declined SAAR $69bn during Q3.