My focus is the Federal Reserve’s latest quarterly report on bank lending standards. If you remember what I wrote back in May, this “Senior Loan Officer Opinion Survey on Bank Lending Practices” provides important insight into the demand and supply of credit. And I also said this is why I pay so much attention:
“When banks are giving away nearly free money to everyone, it boosts growth. But when banks tighten loan standards, or make loans costlier to get, it’s like a lead anchor around the economy’s neck. That’s because credit is the lifeblood of a debt-addicted economy like ours.”
With that refresher out of the way, get a load of what we learned late yesterday from the Fed …
Lenders to small businesses tightened loan standards significantly. In fact, more banks are tightening standards on commercial and industrial loans now than at any point since the fourth quarter of 2009. That was just after the Great Recession ended.
Remember how I told you recently that between 2009 and 2015, we had a ridiculous surge in easy lending to commercial real estate borrowers? A surge that helped inflate an even bigger bubble in that sector than we saw in the mid-2000s? Well, that game is OVER.
A whopping 31.4% of lenders, on net, tightened standards for CRE loans in the third quarter. That was up from 24.6% in the second quarter and also the most since late-2009.
But here’s the biggest shocker of all (at least to those who didn’t see it coming). More than 8% of lenders raised standards on auto loans this quarter. That was a huge swing from last quarter, when lenders were still making it easier to get car financing.
As a matter of fact, it’s the tightest lenders have been with car loans since the Fed started tracking them separately in the first quarter of 2011. If you use a proxy category that included auto loans prior to that date, you see banks haven’t been this tight-fisted since – you guessed it – late 2009.
More of a visual person? Then look at these two charts.
The first makes it crystal clear that the flow of CRE financing has been getting tighter for a year now … and that there’s no relief in sight. That will only exacerbate the nascent slowdown in construction that I wrote about yesterday.
The second chart shows that we’ve just seen the longest stretch of easy auto lending in U.S. history. Lenders gave any and all comers access to new- and used-car loans, whether they were inherently qualified or not. That goosed sales to completely unsustainable levels, just like the easy mortgage boom in the early-2000s artificially inflated home sales.
But, the tide is turning. Now, lenders are finding religion amid rising worries about delinquencies and defaults. Now, they’re starting to crack down. That will absolutely, positively help to pop the auto bubble, regardless of what the shills on Wall Street say.
In fact, today’s lousy July sales figures from both General Motors (GM) and Ford Motor (F) tell me that process is already underway. Ford sales fell 2.8%, when a 1.7% drop was expected, while GM sales fell 1.9% when a 1.9% rise was forecast.
|“It’s all fun and games for the economy when credit is easy.”|
Bottom line: It’s all fun and games for the economy when credit is easy. But when banks tighten the screws, it’s game, set, match. Invest accordingly.
What do you think? Do these tighter lending standards suggest a recession is in the works? Or can fiscal and monetary policy offset that negative factor? Are you worried about commercial real estate and autos? Or can weakness in those sectors be offset by strength elsewhere? Let me know in the comment section.
Until next time,
What the heck is going on in the economy? And what should we as investors do in response to the latest lackluster figures? Those were the two major issues you weighed in on at the website in the past 24 hours.
Reader Steve offered this take on the markets: “Calm before the storm, maybe? Wasn’t the Summer of 1928 like this summer? The markets were flat. But investors insisted upon growth in yields, so they pushed the markets off the cliff. I also think that the Summer of 1932 was very similar, and the Fed’s stupidity put FDR in office.
“Will this be any different? Or will this be another verse in the song that Mark Twain said rhymes with the passage of time.”
Reader Chuck B. shared these thoughts about the economy: “Not only is construction declining, but so is manufacturing. That means lower earnings for many wage-dependent people. In turn, stores and online sellers will see lower earnings as people max out credit.
“We already see auto makers planning to cut back production as sales decline. The only reason for stocks to rise is because of foreign money flooding the only rising world markets. How long can those markets continue rising?”
Reader Vinman added this view on the longer-term lack of growth: “Interesting fact: Eight years of the Obama Administration and not one year of 3%-or-over GDP growth. Does anyone believe it would be any different under a Clinton administration that wants to raise taxes to redistribute the wealth even further? I think Trump could easily trump 3% with his pro-growth plan.”
And Reader Ilan K. shared this opinion on how the Fed might respond: “Since the Fed raised short-term interest rates back in December of last year, the economy and the job market have slowed down dramatically. Still, all they keep talking about is the timing of the next rate hike. If things continue the way they have, a reverse will be in order. Let us hope that it does not get to that point, since they will be very reluctant to admit their initial mistake.”
So what are you doing about it? Reader Tasmica offered this investment advice: “Besides my significant (for me) investment in a silver/gold company, I have been selecting what I think are strong corporations with decent dividend payouts.
“One subgroup I’ve selected after Brexit has been investment banking advisory firms that advise clients on M&A, recapitalization, restructuring, and other financial matters. The turmoil in the capital and corporate markets for the foreseeable future should be fertile territory for their expertise.”
Thanks for taking the time to speak up. I continue to see signs of turmoil behind the scenes in the currency and metals markets, and believe it’s only a matter of time before stocks sit up and pay attention. Traditional indices of fear/complacency, like the VIX, seem way too low … while economically sensitive stocks seem way too high thanks to hopes for stimulus that simply won’t deliver enough of a kick.
My advice? Stay cautious, nimble, and focused on stocks that offer a solid combination of yield, stability, and modest growth even in weak economic environments.
As for gold, make sure you consider coming to see me at The MoneyShow Toronto. It’ll be held September 16-17 at the Metro Toronto Convention Centre, and will feature more than 50 in-depth expert presentations – with a focus on opportunities in the metals and resources sectors.
I’ll be taking part in a panel discussion, as well as delivering a solo presentation. Just click here or call 800-970-4355 and mention priority code “041484” to register for your free spot.
What a surprise – the widely hailed “28 trillion-yen” stimulus package in Japan is actually much, much smaller in terms of “hard-dollar” spending. Specifically, it will only include about 4 trillion yen of direct spending in the fiscal year that ends next March and 3.5 trillion yen the following fiscal year.
The rest is fluff, soft-dollar programs like loan guarantees that will have hardly any impact. Economists said the program may boost GDP by only a couple tenths of a percentage point. There’s a great chart in that linked article, by the way, that shows the announced size of various stimulus programs over the years compared with actual spending. Suffice it to say these things NEVER live up to expectations.
The Bank of England will release its first, comprehensive post-Brexit analysis of the economy on Thursday. It will also likely cut that country’s benchmark rate from 0.5%, and potentially put other stimulus measures into play.
Health officials are warning people to avoid visiting a Miami neighborhood due to an outbreak of Zika infections there. It’s the first such warning in the continental U.S., though authorities believe anti-mosquito efforts will ultimately prove much more effective here than in the Caribbean or Latin America.
Personal income rose 0.2% in June, while spending climbed 0.4%. The consumption figures slightly beat expectations, while the income figures missed them. A key indicator of core inflation came in at 1.6%, continuing a streak of readings that have missed the Federal Reserve’s target of 2%. As a matter of fact, inflation hasn’t hit that target since 2012.
What do you think of Japan’s latest stimulus program, and the fact it will likely have hardly any impact on the real economy? How about the Bank of England … do you expect any surprises there when it meets on Thursday? Are you worried about the latest Zika outbreak, or is this just a tempest in a teapot? Let me know what you’re thinking in the comment section.
Until next time,