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Tuesday, October 06, 2009


total loans and leases

chris whalen:

[W]hile we all do hope for better times ahead, the fact remains that the supply of credit available to the global economy continues to shrink with the balance sheets of banks around the world. ...

[W]hether the deal makes sense or not, there is just no financing to be found. The continuing reduction in bank credit is entirely visible, yet somehow the inhabitants of Washington and Wall Street continue to pretend that it just ain't so.

Lending by the largest banks that received government bailout support declined for the sixth consecutive month in July, the Treasury Department said in its monthly report. Average loan balances at the top 22 recipients of government bailout support dropped by 1 percent in July. Average loan balances had also fallen by 1 percent in June, reports the AP.

But the reduction in available credit is not just reflected in loan balances. More important to many industries and investors is the huge reduction in unused credit lines, what we call Exposure at Default or "EAD" in the IRA Bank Monitor. ...

Now it appears that the entire large bank peer group, roughly the same institutions in the Treasury lending survey, are all trying to reduce EAD as the banking industry heads into the worst part of the credit crunch in 2010. This, by the way, is why Citigroup, Bank America and other happy campers like SunTrust (NYSE:STI) are making all of this noise about repaying the TARP, hoping against hope that they can raise more common equity before those Form 13s starting appearing on EDGAR, showing that the smart money is running away from financials at flank speed. More on this next week.

Bottom line is that deflation is still the chief threat to the US economy, driven by a relentless contraction in bank and nonbank credit. Until we see a restoration of the market for nonbank finance and a sustained turn in the EAD of the large bank peer group, which accounts for almost 70% of the entire US industry balance sheet, we do not believe that any economic recovery will be meaningful in terms of jobs or asset prices. Indeed, we have to wonder whether the FDIC should even try to impose another assessment on the banking industry to fund failed bank resolutions when the effect of this action is to remove capital from the system and thereby accelerate the shrinkage of the collective balance sheet of US banks.

Before Secretary Geithner and the G-20 talk further about raising bank capital levels, we first need to find a way - and fast - to stabilize the existing capital base of the banking industry. Failure to do so, in our view, could be catastrophic for the global economy and could also further radicalize the political situation in the US, where many Americans are starting to realize that the party is well and truly over. As we said on CNBC on Monday, talking about raising bank capital at the present time is the functional equivalent of the imposition of the Smoot-Hawley Tariff Act of 1930. We desperately need a different approach.

i wholly agree with whalen -- traditional inflationary concerns are a non-starter in an environment where private sector credit reduction is overwhelming central bank balance sheet expansion and inexorably overtaking undersized fiscal stimulus. the much-discussed withdrawal of such support will, i suspect, relatively quickly create the political will for its reinstatement. (as an aisde, the reserve bank of australia today became the first to raise its policy rate, from 3% to 3.25%.)

the final arbiter of where we are going, absent a miraculous revival in securitization, will be total loans and leases. albert edwards via zero hedge:

One question I am often asked at the end of a presentation is “how will you know if you are wrong?” Resisting the temptation to totally reject this possibility, I think perhaps I can identify one thing that might indicate this post-bubble world had defied the law of gravity and was reinflating again. Back in the early 1990s minicredit crunch it was not until the middle of 1993 that private sector demand for credit began to grow (supply was not a problem as banks were already healthy). To gauge whether the world economy can surprise and escape this balance sheet recession, keep a very close eye on the bank lending numbers. They may hold the key.

the h.8 is arguably, barring the re-emergence of systemic funding pressure, the most important report being released for the duration of this balance sheet recession.

UPDATE: more from whalen via distressed volatility.

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ECRI, as you know, has called for a cyclical change in the FIG pointing to increasing inflation. Janszen continues to be resolute that deflation is impossible.

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What the heck happened in 2004? Why the big down spike then?

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they are banging on the table hard, rb. and who can really argue against their track record?

well, maybe i can, though poorly.
the harvard economic society immortalized by galbraith and others was forecasting recovery all the way into 1932. why? were they (and many others, including moody's and an as-yet-unrepentant irving fisher) stupid? of course not. indeed they were more intimately familiar with business cycles and intermittent depression than anyone now living.

i've never been able to track down one of their analyses, but i imagine they monitored a variety of cyclical indicators similar to what ECRI monitors in the LEI and FIG. i rather amateurishly attempted to get at that idea in deconstructing LEI.

what undid these persistently optimistic forecasts throughout the following few years was what they did not really attempt to observe -- a secular inflection point in private sector leverage.

i would say that, if this has not been a secular inflection point for private leverage in the united states and elsewhere, the ECRI will be right. if the fed can create larger current account deficits, get securitization kickstarted, start bank balance sheets expanding, we will avoid depression.

i find this to be illuminating:

Persons, Brookmire, and Moody, all looked to past data-series to understand the future. This technique can illuminate useful economic relationships that hold during “normal” times. Yet it is unhelpful when major unprecedented events (such as wars or depressions) occur. The forecasters studied here talked of having models, but in fact did
not have true models. A model is something that considers causation, and only Fisher perhaps meets that criterion. Most of the others really studied trends. They looked at the past and said, “if something happened before it will happen again.”

reading this paper for just the history of walter persons and his "A-B-C" (speculation-business activity-banking, or lead-current-lag) anticipation of business cycle turns might -- only might, pending future outcomes -- be a useful antidote to any hubris over the ECRI's magnificant cyclical record to date.

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rb, i read janszen only intermettently but with interest -- do you care to summarize your takeaway from itulip?

from my end, it seems he thinks a 2002 repeat is underway -- massive easing averts debt deflation. is that a fair characterization?

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funny bwdik -- i thought if anything someone would comment on the huge two-period surge in september/october 2008. that was the reclassifying of thrift assets (countrywide, washington mutual) to bank assets as BAC and JPM took them on -- so clearly the data is unadjusted for acquisitions.

that big tick down is october 2003, and could be related to the BAC-fleet deal -- but i hasten to add that i don't know.

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of course right after i hit 'publish' i find this:

A number of balance sheet items have changed as a result of declines in some banks� reported consolidations of variable interest entities (VIEs). Most of these declines reflect some banks� decisions to stop consolidating their VIEs in response to the announcement by the Financial Accounting Standards Board on October 9 that it had decided to defer the implementation of its Interpretation No. 46, Consolidation of Variable Interest Entities from the first reporting period beginning after June 15, 2003 to the first reporting period ending after December 15, 2003. For further information, please see the FASB website, In addition, a small part of the decline reflects a restructuring of some VIEs so that they no longer need to be consolidated on bank balance sheets.

in other words, that's where many off-balance sheet special purpose vehicles that later became so infamous as securitization imploded -- SIVs, conduits -- went off-balance sheet. bloomberg reflects in february 2008 -- cute how they speculate that maybe even lehman is in trouble....

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From my notes on what the ECRI uses as components of its FIG:
1. Industrial material prices
2. Real estate loans
3. Insured unemployment rate
4. Interest rates (yield spread)
5. Civilian employment
6. Federal and nonfederal debt
7. Import prices
8. Percentage of managers reporting slower deliveries (I have my notes down as vendor performance component of ISM index)

ECRI calls this their 3ps move i.e., pronounced, pervasive (broad-based among their indicators) and persistent.

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Couple of other notes:
1. ECRI claims to have validated their models for periods including the 1930s depression
2. I read Janszen intermittently too and my takeaway was the same as yours.

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Thanks for looking that up, GM.

The ECRI is just trying to sell their service--they are willing to twist things any which way to "prove" that they were right in the past.

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Not to bang ECRI's drum, but it's good to be aware of what they say about their own models . What if 2009 turns out to be like 1932-lite ?

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great link, rb. it's important too to realize that the private sector deleveraging of the US ran from 1929 to 1954 or so -- and in that time there were cyclical upturns.

as i said the other day, if that deleveraging doesn't get started -- and ed harrison for one is skeptical that it is starting -- ECRI is very probably right.

but if this is a secular turn in leverage -- and that's my disposition, given the heavy damage to both banks and pledged collateral valuations -- chances are ECRI's outlook right now is excessively rosy. the truth is that the ECRI dataset isn't comprehensive enough -- it hasn't seen but one other instance of a secular delevering, during which it did in fact miss a signal in 1930-31. and even then, the scale of private sector leverage this time around is much greater and inclusive than in any previous example thanks to the democratization of credit. i wish we'd been collecting data for 400 years through several of these long cycles; but as we haven't, we're stuck on correlations, any and all of which may break down.

to that end, i'm looking forward to reading the rogoff/reinhart book "this time its different" -- but the conclusions that emerged from their paper were obviously quite pessimistic. even then, the scarcity of fiat/floating rate currency regimes in even the 800-year record makes this blind sailing in many respects.

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Janszen says "Do not fight the Fed" and that the end-game is a currency crisis.

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