Where's the Credit?

I used to love those Wendy’s commercials in the 1980s. You know, the ones that mocked the burger patties at competing restaurants with the catchphrase “Where’s the beef?”

Today, I can’t help but ask a similar question about the U.S. economy. Namely: “Where’s the credit?”

Despite all the money pumping at the Federal Reserve …

Despite the almost-$800 billion economic stimulus package …

Despite all the bailouts, backstops, and handouts for bankers, brokers, home builders, mortgage lenders, and so on … credit just isn’t growing. And that virtually guarantees my double-dip recession scenario will play out.

Mortgage Debt … Credit Card Debt … Corporate Debt —
It’s all shrinking!

The most glaring and obvious example of credit shrinkage is the mortgage market.

Just take something like the Mortgage Bankers Association’s purchase loan application index: It topped out at 529.30 in June 2005. This week, it registered 168.90. That’s a stunning 68 percent decline in this key gauge of mortgage demand.

But it’s not just mortgages …

The Fed tracks demand for consumer credit — auto loans, credit cards, and so on. It shrunk $9.1 billion in May after collapsing $14.9 billion in April. Consumer credit has now declined a whopping 18 out of the past 20 months — by a cumulative $167 billion!

Consumers are cutting back their spending.

Wait … what about all those “great” earnings reports from the U.S. banking sector? Surely, the banks are making gobs of loans and reaping handsome rewards, right?

Actually, no …

In fact, they’re boosting earnings by releasing credit reserves and cutting back on loss provisioning. I think that’s nuts heading into a double-dip recession. But then again, I’m not a banker whose bonus depends on his earnings topping targets.

Take Wells Fargo (WFC). Average total loans there were $772.5 billion in the second quarter, down more than 7 percent from $833.9 billion a year earlier.

Then there’s JPMorgan (JPM). Average loans were running at $146.3 billion in the second quarter, down 16 percent from the same period a year earlier.

At Bank of America (BAC), we did get a bit of growth. But I’m talking peanuts! Average loans and leases were $967 billion in the quarter, up a measly 0.09 percent from $966.1 billion a year earlier.

What about the regional and super-regional banks? Same story …

Dallas-based Comerica (CMA) reported total loans of $40.7 billion, down from $47.6 billion in the same quarter of 2009.

Salt Lake City-based Zions Bancorporation (ZION)? $38.2 billion versus $41.4 billion.

Buffalo-based M&T Bank (MTB)? $50.2 billion versus $51.9 billion.

I could go on, but I think you get the picture.

So …

Why Aren’t We Seeing Any Credit Growth?
I’ll Tell You …

Economists and pundits can’t seem to agree why we aren’t seeing any credit growth.

Some blame stingy banks for tightening lending standards too much. Others claim the recent financial reform bill is making banks too uncertain and cautious.

Still others think monetary policy is to blame.

They want the Fed to cut the interest rate it pays on the excess reserves banks park in its vaults from 0.25 percent to 0 percent. That would supposedly inspire banks to make more loans rather than just store idle money at the Fed.

No matter how much cash Washington passes out, it can’t create an economic recovery.

But there’s a very simple answer few people — especially Washington politicians — want to give. There just isn’t any demand out there!

Consumers are wisely deleveraging after going on the wildest borrowing binge in world history. Businesses aren’t borrowing because they don’t need to add factories and hire workers when end user demand for their products remains weak.

That’s why all the money pumping and all the government stimulus isn’t boosting credit or creating a sustainable economic recovery.

This is precisely what we saw happen in Japan after that country’s twin bubbles in stocks and real estate popped.

The Bank of Japan slashed rates to near 0 percent. The government passed stimulus package after stimulus package. Yet the economy muddled along with weak growth and periodic recessions for several years as it worked off the hangover from the bubble days.

Could we be in store for something similar? I sure think so. And that’s why I’m bearish on stocks and the economy here.

Until next time,

Mike