Some absolutely crucial lending news came out in the last 24 hours. Many people on Wall Street aren’t paying enough attention … yet … but I urge you NOT to ignore it.
Market Roundup
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.
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,
Mike
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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.
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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,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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I would just like to know where I can go with bad credit and get a loan that I can payback in years not months
Hi,
I noticed my IRA is losing money and I’m not happy about it, I just rolled it over from my job to LPL Financial. I know the market goes up and down but this guy told me they would make me money because they don’t want to lose money then they don’t get paid, I’m beginning to think this was crap.
I’m thinking about paying my home office in 2017 because I won’t be able to make my bills due to retirement. Some say it’s a bad idea but for me it’s the best thing, what’s your thought on that?
Thank you,
Debbie
Debt Free is always the best option. A person doesn’t need a lot of money to survive if not paying the banks and other money suckers. I am working on the same plan – debt free – guaranteed return equal to interest rate your paying.
If I have the loan I needed from the bank I could be able to invest nearly $300 /month. But, I didn’t get the loan I couldn’t.
Question: Is there a high probability of a major economic setback/collapse this November? If not then when?
Mike
I don’t understand your charts. What do the vertical axes depict?
Good question, Mike!
Exactly, Joe. The vertical axes are not labelled. I thought the more positive the figure meant more lending, but obviously that’s not correct reading Mike’s analysis of the charts. Mike, would you please label the charts? Thank you.
More lending by reports to italys oldest bank,5 billion,by GS,BAC etc I suppose to halt (slow) the slide into the abyss.I have agree with Mike,they cannot ever repay 20trill so the only way to assist payment is devalue,then gold heads north,Zika,glad to live in the UK,too damn cold for the little devils
Mike,
Great insights as always. Thank you.
The charts and data are compelling. The credit/debt side of the markets are the distant early warning of what’s coming on the equity side. It ain’t pretty!
IMO we’ll be fortunate if a recession is the only consequence of this latest “everything” binge…
I think it would be really nice if you told us what is being plotted on the vertical axes of the graphs you provide. Whatever it is, it seems that positive numbers are bad news.
Before the referendum Mark Carney( ex Goldman Sachs) now Governor of the Bank of England, stated that in the event of a Brexit vote that house prices would drop by 30%.
The latest Moneywise survey of house prices states that since Brexit they have actually risen by 0.5%.
How credible will his next set of forecasts be?
The demographic spending pattern by age groups is well known and set in stone. It takes 20 + years for a new generation to enter the work force (s) in the world and impact economic growth. With current aging populations, lower birth rates and later marriages have economists, companies and governments seriously considered the financial implications in a world overburdened with public and private debt? Oh yes, then there’s the unknown of the what, where or when the next Black Swan will appear to burst the multiple bubbles brewing. We live in interesting times, indeed…
Driving around the outer part of metro area where I live, the CRE situation has changed dramatically from the late 1990s, when I first came to the area. Businesses were then expanding outward to the edges of the metro area, with new office parks and buildings being built, which remained true until 2007. Even after that, things seemed to be in equilibrium until about 18 months ago.
Then I started to see more and more empty buildings for rent, and now, whole office parks and shopping centers. There’s a shopping center near where I live (not in the outer suburbs) that’s been abandoned. When I came nearly 20 years ago, it was thriving. Even closer to the city, I see persistently empty commercial property here and there that I never saw until a few years ago.
If the auto lending crunch is a precursor to the Auto manufacturing crash that you are suggesting, then if a person with average credit was to buy a new luxury car and put little down on it and was planning an undisclosed job or personal relocation with a false forwarding address, wouldn’t that be an easy way to get a new car for free, if he did his homework prior to the crash ? I mention this because of the housing crash of 2007 and the many banks that were left holding the mortgages with little chance of recovering their losses.. No way am I suggesting anyone should attempt this in my question to you..
Easy money destroys innovation, promotes speculation, and excessive, non-productive debt, both business and personal, that will not be payed off. It’s the perfect formula for the recession we are likely already in.
I do not believe another stimulus program would work for Japan . I THINK THEY NEED TO BALANCE THERE BUDGET , GIVE THERE HARD WORKING PEOPLE A TAX BREAK AND LOWER TARIFFS ON IMPORTED FOOD . A REAGAN REVOLUTION FOR THE PEOPLE OF JAPAN JUST MIGHT DO THE TRICK .
Unfortunately many governments have missed the Boat ! The low rates bought them time to get there fiscal houses in order . Instead they squandered the time and doubled down on there debts which leaves us to where we are today .
I am worried we will have consolidation in gold now with oil also dropping which does
not look good for the markets now. The next leg up for gold will bring great relief
for our economy then we get hit with elections, which is totally unpredictable for
little guys like me.
This is one of the most government manipulated economies I’ve ever seen. The Stock Markets appears to totally manipulated by the Central Banks in a bid to save retirement plans. Precious metals being held artificially low to prevent the illusion of inflation. Phonied up first time jobless numbers years on end to present the illusion of a recovering economy. A strong US Dollar based on exactly what? It will all come to a head sooner or later and all sh-t will break loose!
Where I live, Minneapolis, people are now paying 50% more for houses than I think they’re worth and much more than before the last housing bust. They are getting loans they can’t afford. Now the slightest up tick in unemployment numbers will send many houses to foreclosure. It could be a stampede.
Living in SoFlo I cannot speak for other areas. Here we have an over-abundance of commercial real estate at hand. We see empty strip stores all over the place. So tight lending standards do not only help the banks but also owners of commercial real estate as they do not need to fear more competition. A the same time lots of condos are being built and we wonder who has the money to buy/rent them.
No matter how cheap it is to service loans, people should try to avoid loans like the plague. The rule should be: If you cannot pay cash you cannot afford it, except a sensible mortgage. Very few people have the power to raise their income if expenses go up So it is prudent to live on 90% (or less) of the income and save the rest. I have a step son who struggles all the time yet takes his teenage kids from Colorado to Broadway to have them enjoy opera and plays. He does that using credit card loans which cost street robbery fees. I call that insane. At the same time he is working (part time) as a waiter in his second job and believes that 25% tips are the “industry standard”. Call me thrifty, I never pay more than 20%.
It is somewhat in our control what the banks do if we control our spending habits. Cut out the banks from your normal activities and they will make good offers. I am amused getting all these credit card and loan offers.
Even the Fed will have one eye on the turmoil in global markets. Buying at or near the top is a poor investment, given the likelihood of a capital loss later. What is the point of buying for yield now, only to lose 30%plus of your share value? Regardless of who wins this race, debt and large scale default awaits us all.
Really Vinman
Do you really think Trump with his “I will huff I will puff I will blow your house down” approach will do any better. 3% you say and where will he pull numbers like that from. One place does come to mind.
It is really hard to swallow the governments consumer spending estimates as we all know it is debt driven not savings thus making it a faux figure. Half of Americans would be hard done by to come up with $400 in an emergency they would have to “borrow” it somewhere. Banks are tightening their loose lending policies. I think this is the consumers last gasp the last hurrah the final curtain on contributing to climbing consumer spending. I am sure the friendly neighborhood banker will not be so accommodating in the near future. He now has to much “skin” in the game and if he is not careful he will be loosing his “shirt”
Even though the Canadian markets were closed on Monday I received quite a surprise when I opened my online account on Tuesday. I was up another $1,000 for a total of $5500 since June 27th a gain of 20%. Even though the Canadian market was closed the American market was still making me money.
Better cork the champagne I see your stock indexes to the right are finally starting to reflect what is truly happening globally. To change from red to black it will take more big buck financial injections. We must be around the 4th inning in this circus.
Having lived in Japan a couple of years
I can tell they won’t bite for stimulus
spending. The Japanese are by nature
very insucure. It’s easy to notice this in
their behavior. This keeps them on just
banking on what they can afford and no
more.
When the wheel of fear and uncertainty
begins to roll we see lenders tighten up.
To borrow a line from the movie Second
Hand Lions “Defend Yourself”.
If consumers are increasing credit card
debt that is double the income we see
happening lenders see this too.
The change in lending standards has everything to do with bank regulators and a whole lot less to do with lenders. Lenders don’t just decide to loosen or tighten lending standards on their own. The CFPB is pushing its ability to repay mantra further from the banks it regulates down to the third party vendors such a dealerships. This agency is out of control! It needs to be subject to the Congressional budgeting process, it needs to be run in a non partisan fashion and it needs to get out of truly independent community banks.
I do not see the US economy as a shining beacon that will draw foreign investments to the US shores by the boatload as some would have you believe. The world economy is so entwined that we are all in the same boat looking for safe harbor. Safe harbor is paved with the only lasting real money there is; gold and silver coinage.
you’ve been right the whole way, mike. good job in spotting this entire slowdown way back many, many months ago.
the Bank’s game are to tightening the loans in the front face, because is more productive to make a loan using other loan companies where they can charge desorbitante Interest rates. and their names are always clean., like they do not do anything wrong.
Should the dollar be challenged FR will raise rates.Never has s bump up of 2percent would have such crashing effect on SM. Stock buy backs by corps are an obvious prep for increase in rates. Yep they have the liquity to cash in on the a SM route.
No amount of stimulus will reverse the “Baby Boomer” effect on economics. The real trend now- and not discussed anywhere- is to sell the large house and downsize. An enormous amount of household goods go to consignment stores and charitable donation stores. Retirees are careful with spending and now buy with the idea that a useful time horizon is getting shorter every day. We drive less and use less fuel. Some couples are going to one car only. Clothing? Very casual- no business attire. With 10,000 people turning 65 every day, the effect multiplies rapidly, and is inescabable. Time to adjust expectations to a no growth environment for awhile, invite young immigrants in, and stop printing money to “stimulate” growth where there can be none.