But I have one “under the radar” recession indicator I never, EVER ignore. And right now, it’s flashing red.
I’m talking about the Federal Reserve’s quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices. I know the name is a mouthful. But the short version is that the Fed surveys bankers every quarter to ask about loan demand, lending standards, credit pricing and more.
|Are banks tightening loan standards – and will that put a cap on economic growth?|
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.
So boy did I ever sit up and pay attention late yesterday when the Fed said:
A net 11.6% of banks tightened loan standards for large Commercial and Industrial (C&I) borrowers. That was up from 8.2% in the first quarter, and the worst reading since the fourth quarter of 2009. That means banks are increasingly reluctant to lend money.
A reading of loan demand came in at negative-8.7 after hitting negative-11.1 in the first quarter. Those were the first back-to-back minus signs in six years – meaning companies are increasingly reluctant to borrow money
What about commercial real estate (CRE)? I’ve been warning about a massive bubble there, and now bankers are starting to pay attention.
They tightened loan standards across the board – for construction and land development, nonfarm, nonresidential buildings, and multifamily properties. In fact, banks haven’t been this tight with CRE financing since the first quarter of 2010.
But here’s where the rubber really meets the road. As you can see in the chart above, we have now had three consecutive quarters of net tightening in C&I lending. That has ALWAYS signaled recession! It did in the wake of the savings-and-loan collapse in the late 1980s. It did during the tech wreck of 2000-2002. And it did during the Great Recession of 2007-2009.
I’m sure the starry-eyed optimists on Wall Street will give you all kinds of reasons you should ignore that track record. But what else would you expect?
I’ll just go back to what I’ve been saying for several months. When the credit market turns, it impacts everything – stocks, risky bonds, commodities, real estate, currencies, you name it. Ignoring those major turns is a surefire way to generate losses, so I hope you’re not doing that.
In fact, I’m doing everything in my power to help you navigate these important turns … to help you not just avoid losses, but also build potentially large profits.
My first recommendation: Read my eBook, the Mystery of the Golden Ratio immediately. It will only be available for free online for a few more days, and it contains critical investment intelligence for you.
My second recommendation: Join me at the MoneyShow Las Vegas next week at Caesars Palace. I’ll have a ton of information about the credit markets for you there, as well as specific, actionable advice on how to profit in this changing market environment. You can join me by clicking here, or calling 800-970-4355, to register today. If you call, please mention priority code 040948.
My third recommendation: Get out of cyclical, economically sensitive stocks and rotate into “safe-yield” names in non-economically sensitive, lower-volatility sectors. Think consumer staples, utilities, or telecoms versus industrials, transportation, and technology. This strategy will help protect you from losses if I’m right and the U.S. economy is stumbling toward recession.
Make sure you also take a few minutes out of your busy schedule to share any advice for your fellow investors, or comments for me, in the discussion section below.
The U.S. dollar, a debt default in Puerto Rico, and the outlook for U.S. stocks were the major topics up for discussion at the Money and Markets website in the last 24 hours.
Reader Ivano offered this take on the greenback: “What is this panic all about? Washington wants a dollar crash and the Fed with zero interest rates forever is accommodating this process. Why? They foolishly think that a cheap dollar will increase exports.
“The problem with that weak idea is that as a result of 100,000-plus pages of government regulations, America is an expensive, inefficient country for manufacturing goods. So stop wringing your hands, since their objective is to devalue the dollar.”
Meanwhile, Reader Gordon shared this view on stocks and the effect of low expectations on market performance: “Companies are buying back their own shares to goose their profits and to make the CEO richer. They are selling less ‘stuff’ than last year, but fancy accounting methods are making them look good.
“So-called economists have lowered the profit bar about 1 inch above the ground, and companies step over it and shout ‘Hurrah! Hurrah!’ as investors scramble aboard the Titanic. The good, old yardsticks of building new plants, hiring more people, and beating last year’s profits are gone.”
Reader Cyd O. also warned about getting too optimistic on the stock market here: “Trading U.S. stocks has become like trading tulips in Holland — the same crowd selling back and forth to each other and raising prices, waiting for the suckers to get in.”
With regards to Puerto Rico, Reader Peter said: “The symmetry with 2008 (Lew saying there will be ‘cascading defaults’ if Congress doesn’t ‘help’ Puerto Rico) is scary. How soon will Illinois follow? And don’t forget that states can’t declare bankruptcy like their cities can.”
Reader Chuck B. also weighed in on that topic, saying: “Puerto Rico just defaulted on some of its $70 billion-odd of debt, and Congress refused to do anything about it. That is not a state, it is federal territory. Therefore, the debt could be said to be part of the U.S. debt.
“Congress, if it lets that debt go defunct, is telling the world, in effect, that this nation feels no real obligation to make good on what it owes. This could begin the process of defaulting on at least some of the $19 trillion, and ultimately, on all the government’s obligations. The politicians may be cutting their own throats – and ours as citizens, also.”
Thanks for weighing in. I’m definitely keeping an eye on the situation in Puerto Rico given the massive size of the territory’s debt load. We’re already seeing the credit markets bend under the weight of massive energy defaults, a significant turn in the auto market, sagging commercial real estate prices, and more. Large municipal bond defaults would make things even worse.
Do you have a different take? Or do you think I’m on target? Let me know by sharing your views in the comment section below.
The European Commission tacitly admitted today that the European Central Bank is failing in its effort to spur strong growth and stronger inflation. It didn’t come out and say so, of course. But it did cut its growth forecast for 2016 to 1.6% and its forecast for 2017 to 1.8%. It also slashed its full-year inflation forecast for the eurozone to just 0.2% from 0.5%. So what exactly was the point of all your QE, NIRP, LTROs, TLTROs, and so on, Mario Draghi?
Voters in Indiana will head to the polls today on both the Republican and Democratic side of the ledger. It appears likely from polling that Donald Trump will win, all but locking up the Republican nomination. Regardless of whether Hillary Clinton beats Bernie Sanders, she is well on her way to clinching the Democratic nomination.
The Reserve Bank of Australia joined the parade of global central banks trying to stimulate their economies, cutting the country’s benchmark rate by 25 basis points to a record-low 1.75%. The move put downward pressure on its currency, which had been appreciating against the dollar since January
What do you think about Europe’s downwardly revised projections? How about the coming end of the primary season, and a likely Trump-Clinton battle for the presidency? Any thoughts on Australia’s move, or central bank rate cuts in general? Let me hear about them below.
Until next time,
P.S. Did you miss my briefing yesterday? This information is so crucial to your financial survival, I’m leaving the recording online for a couple of days. So if you missed this all-important call or want to listen again, be sure to do it NOW!