The Macro Market Wrap Up With The Mad Genius, Vol. 26

Continuing with the review of my 2018 forecast, then next thing I mentioned in my January comments was lending. I have published a series of charts several times in the past, and it’s time to revisit them once again. All the charts are from the FRED of the St Louis Fed, and you can google them yourself as well. To change the chart to percent change year over year, click the edit button on the top right of the chart and use the drop down menu to make the change.

The first chart is Bank Credit of All Commercial Banks. The year over year percent change is once again increasing and at a faster rate than previously. This means consumers are borrowing more and more cash to pay for stuff (total is up to $13.04T). Now usually if you ask someone, “Hey I know you were struggling before. How are things going these days?” I things have improved for that friend, he’ll probably answer something like, “Well with the new job I’m finally back on track with my mortgage and I was able to pay down my credit card debts.” We see from this example that when things are going well, people are paying off debts, not increasing and taking on new debt. So if consumers are taking on more debt, that means things are turning south. And like I’ve said, as interest rates rise, that will also crank up the pressure. So consumers are taking on more debt and the cost to service is going up as well.

The next chart is Commercial and Industrial Loans All Commercial Banks. This number is again rising, and the percent change is also rising. And we can see here as well that that leading into recessions, the number begins to spike. This makes sense because at the end of a business cycle, when companies are most optimistic, they borrow like crazy to increase their plant capacity, buy new equipment, and engage in mergers and acquisitions. At 10 years into an economic expansion, we are close to, if not at the end of, the current Juglar cycle of fixed investment.

The third chart is Real Estate Loans All Commercial Banks. This now stands at $4.4T, however, the year over year percent change is still trending downward. And I would expect that to happen as interest rates rise, it makes it more expensive to buy or refinance real estate. This clearly peaked in October 2016 at 7.52% yoy increase, and now it is down to 3.0%.

Next is Consumer Loans All Commercial Banks. The sheer amount of consumer loans is now approaching $1.5T. What this represents is for every $14 of economic activity, over $1 was borrowed to create that activity. On a year over year basis the percentage change is falling, now at 4.9% increase from the prior year. This is greater than the latest GDP print of 3.4%, meaning that if consumers are borrowing faster than the economy is growing, it’s because they really can’t afford to buy stuff with their current income.

But consumer loans is worse, because the Delinquency Rate on Consumer Loans All Commercial Banks is now up to 2.28%, up from a low of 1.98% in 2Q15. You might think 2.28% delinquency is not so bad, but on $1.5T that represents $34 billion of lost economic activity. Remember that yesterday I said excess reserves are decreasing because of defaults at banks. Here is just part of that number. I also said defaults are not such a big portion, because remember the reduction in excess reserves over the last four years is $1.05T. and this $34B is just for consumer loans, which doesn’t include residential or mortgages, and it doesn’t include business loans, and it doesn’t include interbank lending either.

The next chart is Automobile Loans, All Commercial Banks, and this is kind of hard to gauge because the data only goes back to 2015. That said though, outstanding loans on cars are now decreasing, and keep in mind that I mentioned a few weeks ago that the major auto makers are seeing dramatic drops in sales volumes of new cars. So it makes sense that total outstanding loans on cars is falling, but on this one we’ll have to wait and see. I suspect that number will continue to fall as interest rates increase, costs to buy raw materials stays high because of tariffs, and as defaults increase as well. the last time I looked at this chart I said that the general pattern on the percent change year over year would continue to fall, and I was right about that. A year ago it was 2% increase year over year, which was falling, and the percent change yoy is now at 0.7%.

The next chart is Real Estate Loans: Commercial Real Estate Loans, All Commercial Banks. If you google this one yourself be careful when you type it in. But the trend of falling yoy percentage change, as I predicted, is still negative. And commercial real estate activity represents any type of real estate bigger than a 4-family home. Office buildings, malls, apartment buildings, storage, warehouses, etc. But really, commercial real estate is a bell weather for the entire economy. The yoy percent change is now -13.7%, so not only is commercial real estate activity slowing, but it is also shrinking.

The final chart representing lending is Consumer Loans: Credit Cards and Other Revolving Plans. The total is now at $1.054T. Remember too that credit card debts are unsecured, meaning no collateral like a car or house, and because there is no security these loans tend to have the highest interest rate. As I mentioned recently, the average credit card is now paying 12.4% higher than the LIBOR rate, which is 3.1%. So the average card is now at 15.5%, meaning $163B a year is now coming out of the economy just to pay interest on credit card debt.

All these charts are trending in the wrong direction for a good economy, and they rather show weakening in key areas like real estate, autos, and consumer spending capacity.

That’s it for today, tomorrow I’ll get into housing. Happy holidays to all celebrating today. Let me know what you think or ask your questions in the comments. Thanks for reading Volume 26 of The Macro Market Wrap Up With The Mad Genius. Until next time remember that there is always a bull market somewhere in the world, and on the opposite side of every crisis, lies opportunity.

#economics #lending #defaults #consumerspending #yearinreview2018