Putting the shadow banking system back in vogue

Let’s talk a little about the data released on Friday. On the plus (contrarian) side, everybody is talking about the unemployment number and NOBODY happened to mention that consumer credit was UP on Friday, even before TALF. I think we are very close to the bottom. I think that New York Fed President Dudley is screaming to the investment funds, hedge funds, private equity to do these deals with TALF.

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Marshall Auerback here.

Let’s talk a little about the economic data released on Friday. On the plus (contrarian) side, everybody is talking about the unemployment number and NOBODY happened to mention that consumer credit was UP on Friday, even before TALF. I think we are very close to the bottom. I think that New York Fed President Dudley is screaming to the investment funds, hedge funds, private equity to do these deals with TALF.

Think of it this way.

A well funded PE fund takes $100M out of a fund of say $1B and does TALF at 10-times leverage and makes, say, a conservative 600 bp (maybe much more — I just don’t know where these ABS credit card and auto spreads are trading right now).

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That’s $60M profit on the $100M investment or 60% per year. Put another way, that’s an incremental 6% on their overall fund returns on the entire $1B sized fund. If they get more aggressive as a percent of total fund invested in TALF the numbers are much bigger.

The Shadow Banking System will be back in vogue.

If this money then gets re-loaned to consumers as the asset is cleared off the banks’ balance sheets, the consumer starts spending and because the Fed has provided the tinder in the form of the Monetary Base, the Velocity of Money picks up — and then money supply and bank deposits and then the economy starts to turn up. And then the demand for commodities and equities participate until the Fed has to take away the “punchbowl” but they will not follow William McChesney Martin as to his prompt responses and that’s when commodities and gold shine.

The issue, short term, is that equities can really blossom if Velocity picks up because the monetary tinder has been just sitting there waiting for the gasoline to be added to the fire.

Am I oversimplying this or leaving something material out?

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Consumer credit: Surprise $1.8 billion jump – CNN Money

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