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The chart below dovetails with our view that credit markets are starting to loosen up, which on the margin is positive. On both on a week-over-week basis and year-over-year basis commercial banks are starting to lend to each other. In theory, commercial banks lending to one another should be the first step in credit trickling down to the broader economy and eventually to the consumer.

Interbank lending troughed at a decline of ~-30% y-o-y and in the most recent data lending is down ~-18% y-o-y. Yet on a week-over-week basis we are finally starting to see the first increase in lending between banks since the September time frame.

The caveat, of course, as the NY Times stated this weekend, is that “demand for interbank loans has been so low, the actual Fed rate has been close to zero for a month.” In essence, the Fed is inducing borrowing by lending money for close to nothing. Our view of inflation emerging in early 2009 is of course predicated on lending continuing to, as President Bush would say, become “unstuck”. We will have our “Eyes On” interbank lending as an important leading indicator of this non-trivial investment theme.

Daryl G. Jones
Managing Director