THE CREDIT COLLAPSE CONTINUES
David Rosenberg is quick to note the continuing collapse in credit. One has to wonder – in a fractional reserve system that is largely based on credit growth – just how long can assets appreciate without growth in credit? Consumer credit is out this Friday. Expect more weakness.
Looking at the chart below, one can get a real appreciation of the way things are — credit is still contracting and this balance sheet repair among debtors and lenders is necessary in order to make the transition, as painful as it may be, to the next sustainable economic expansion and bull market. Bank lending has declined now for 21 weeks in a row, and last week sank an unbelievable $33 billion, and over this entire frame, the amount of loans & leases that has vanished has totalled an amazing $216 billion or a record 15% annual rate. (As an aside, and a blow to the V-shaped advocates, the FDIC closed another NINE banks to close out the week.)
The contraction in bank credit is broad based across all lines of business — consumer, real estate and companies — and seems to be motivated by both the bank and the borrower. This is a dead-weight drag on aggregate demand and it goes to show that the real story in Q3 was not that it was so wonderful that real GDP expanded at a 3.5% annual rate but that the number was so low in view of the massive dose of government stimulus and that the contraction in credit is ongoing and acting as a tourniquet on private sector spending activity.
Meanwhile, cash on banking sector balance sheets soared $160 billion last week and now total a record $1.3 trillion, and the bond bears out there should note that this cash is increasingly being diverted towards purchases of Treasury securities as opposed to household and business lending. This is 1992-93 all over again when the commercial banks used the steep yield curve as an opportunity to reliquify their balance sheets, and the flip side of that process was a listless and jobless recovery. The only difference is that the credit contraction process this time around will prove to be even more pernicious and enduring than it was back then, and inevitably drag Treasury note yields back down towards the lows we saw almost a year ago.
Indeed, the question about whether the ongoing credit contraction is being led by supply or demand factors is an interesting one and there were some newspaper articles today that shed some light on this. First, the front page of the WSJ runs with Jittery Companies Stash Cash — the article cites data showing that of the 248 companies that have reported thus far (from the S&P 500 universe), cash on the balance sheet rose to a 11.1% of assets from 10.1% in Q2 (and 7.9% a year ago) which is the highest in 40 years. So, either the corporate sector is seeing a rather different economic outlook than the mainstream economist (and hedge fund manager) or there are simply few new investments that are seen as offering very good return potential by the business sector.
Now on the demand side, we highly recommend the piece on page 17 of the FT – Credit Card Offers to U.S. Consumers Plunge 71%”. A survey highlighted in the article showed that U.S. credit issuers sent 391 million direct mail offers in Q3, down a whopping 71% from a year ago and light years away from the 2 billion cards per quarter that were being mailed out during the 2005-06 credit boom. Note that average interest rates on plastic rose 100bps last quarter to 11.43%, so this notion of rate relief may have hit the odd stressed-out mortgage borrower but seemed to have bypassed credit card users.
Source: Gluskin Sheff
The deleveraging process stay irrational longer than the US government can stay solvent.
Oh, I should add, I saw an article — I believe was in CFO magazine by a Duke B-school professor — that boiled down to companies aren’t investing in positive NPV projects. So the question may for companies may be whether they trust the inputs … low and stable discount rate, steady (or any) cash flows/return, etc. I would be very interested to be a fly on the wall for those conversations, what goes into the sausage is often scarier than the sausage itself….
Good Stuff frm DR
good rule of thumb
If the banks arn’t lending
The economy is ending
Consumer lending always decreases during recessions. And, considering the bubble of 2002-2005, one would expect and hope for an even bigger decrease. No doubt, unproductive sectors of the economy will be in a depression. But, business credit, at least for large businesses looks good, which means that they are in a position to invest to enhance productivity, develop new products. Good bye to the days of everyone getting a new SUV every 3 years; hello to more efficient and recyclable autos, better public transport, computerized traffic management.
one caveat as far as lending to companies goes:
banks are effectively transferring credit risk from their balance sheets onto the bond markets.
an overwhelming part of new issued corporate bonds are being used to pay down/refinance existing bank debt.
http://blogs.wsj.com/economics/2009/10/13/too-cash-strapped-to-brag-companies-arent-using-borrowing-to-spend/
so if we want to judge lending as a whole we should include in part the wave of corporate bond issues. (but even with that aqddition i guess we´re still shrinking at an incredible pace)
another indication that appetite for credit by companies is low are utilization rates: http://blogs.wsj.com/marketbeat/2009/10/22/banks-borrowers-appetite-for-loans-are-feeble/
one caveat as far as lending to companies goes:
banks are effectively transferring credit risk from their balance sheets onto the bond markets.
an overwhelming part of new issued corporate bonds are being used to pay down/refinance existing bank debt.
http://blogs.wsj.com/economics/2009/10/13/too-cash-strapped-to-brag-companies-arent-using-borrowing-to-spend/
so if we want to judge lending as a whole we should include in part the wave of corporate bond issues. (but even with that aqddition i guess we´re still shrinking at an incredible pace)
another indication that appetite for credit by companies is low are utilization rates: http://blogs.wsj.com/marketbeat/2009/10/22/banks-borrowers-appetite-for-loans-are-feeble/
BTW I love your blog!
From that graph it appears consumer credit growth has averaged 6-7% over the last few decades. That makes sense in our fractional res. banking system as interest rates have averaged the same 6-7% and as such this has allowed banks ‘organically’ grow credit as deposits grew by a similar amount, keeping their capital ratio’s intact
The problem over the last decade is that as interest rates collapsed banks could only grow credit at the same amounts they were used to by leveraging up that bit more (ie credit growth outpacing deposit growth). Further, securitisation and the exponential growth in credit derivatives allowed this to happen with regulators barely noticing. As such to keep credit growing at 6-7% banks were synthetically taking on more and more risk. Its almost as if we were so hooked on 7% credit growth we needed securitisation to fudge it as it couldnt happen ‘organically’ like it had in decades before with higher deposit rates growing the deposit base naturally
So, here we are, the credit derivative securitisation game is up, banks are heading back to historical capital / leverage levels, Interest rates are zero and as such deposit growth is barely growing…so how exactly do we expect to get back to growing credit anything like the past without the banking system adding leverage to their balance sheets?
Basically I cannot see how its possible as the banking system will be at the margin reducing leverage not adding to it for a very long time
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