U.S. Weeks Away From A Recession According To Latest Loan Data

While many "conventional" indicators of US economic vibrancy and strength have lost their informational and predictive value over the past decade (GDP fluctuates erratically especially in Q1, employment is the lowest this century yet real wage growth is non-existent, inflation remains under the Fed"s target despite its $4.5 trillion balance sheet and so on), one indicator has remained a stubbornly fail-safe marker of economic contraction: since the 1960, every time Commercial & Industrial loan balances have declined (or simply stopped growing), whether due to tighter loan supply or declining demand, a recession was already either in progress or would start soon.

This can be seen on both the linked chart, and the one zoomed in below, which shows the uncanny correlation between loan growth and economic recession.

And while we have repeatedly documented the sharp decline in US Commercial and Industrial loan growth over the past few months (most recently in "We Now Know "Who Hit The Brakes" As Loan Creation Crashes To Six Year Low") as US loans have failed to post any material increase in over 30 consecutive weeks, suddenly the US finds itself on the verge of an ominous inflection point.

After growing at a 7% Y/Y pace at the start of the year, which declined to 3% at the end of March and 2.6% at the end of April, the latest bank loan update from the Fed showed that the annual rate of increase in C&A loans is now down to just 1.6%, - the lowest since 2011 - after slowing to 2.3% and 1.8% in the previous two weeks.

Should the current rate of loan growth deceleration persist - and there is nothing to suggest otherwise - the US will post its first negative loan growth, or rather loan contraction since the financial crisis, in roughly 4 to 6 weeks.

An interesting point on loan dynamics here from Wolf Richter, who recently wrote that a while after the 1990/1991 recession was over, the NBER determined that the recession began in July 1990, eight month after C&I loans began to stall. "As such, the current seven-month stall is a big red flag. These stalling C&I loans don’t fit at all into the rosy credit scenario. Something is seriously wrong."

However, it wasn"t until loan growth actually contracted, that the 1990 recession was validated.  Well, the US economy is almost there again. And this time it"s not just C&I loan growth, or lack thereof, there is troubling.

As the chart below shows, after peaking in late 2016, real-estate loan growth has also decelerated by nearly half, to 4.6%.

More troubling still, after flatlining at nearly double digit growth for much of 2016, starting last September there has been a sharp slowdown in commercial auto loans, whose growth is now down to just a third, or 3%, of what it was a year ago.

While it remains to be seen if C&I loans have preserved their uncanny "recession predictiveness" for yet another turn of the business cycle, the charts above confirm that the US economy is rapidly slowing, and validating the poor Q1 GDP print. Furthermore, one thing is clear: absent a substantial rebound in loan growth, whether for commercial, residential or auto loans, there is no reason to expect an imminent uptick in the US economy. We only note this, because next week the Fed plans to hike rates again. If it does so just as US loan growth contracts, it may be doing so smack in the middle of a recession.

Make 'Soft Data' Great Again - Economic Confidence Rebounds To 16 Year Highs

The last time American consumers were this confident about the national economy was August 2001.

As a reminder, the market is not the economy... and a rising economic confidence on the heels of rising stock prices does not "forecast" the economy...

For those who believe there is more left in stocks to run, we note that economic confidence was rising to these levels in July 1997 - so you have about 30 months until the world implodes by that measure.

There"s just one problem with that exuberance...

"Soft" versus "Hard" Data again!!

The End Game

Authored by Kevin Muir via The Macro Tourist blog,

We all know the terrifying debt statistics. We are bombarded every day with bearish reports about the gargantuan Federal debt, and when combined with the growing private sector indebtedness, the monolithic entitlements problem, and the looming pension fund shortage, it is easy to wonder how we will ever get out of this colossal mess.

I do not dispute the numbers one bit. We have too much debt. It’s simple math. We are screwed. Full stop. All of this debt will never be paid back in real terms. Truth be told, I am probably one of the most bearish people out there when it comes to our debt problem.

But I differ greatly from the vast majority of my peers about what that means for the economy and financial markets.

There are three solutions to the problem of over-indebtedness.

The first is to grow your way out. Maybe you cut some spending, hunker down, trim up the sails, and right the ship through good old fashioned economic growth. This solution is a pipe dream left for little children and romantics. In a balance sheet challenged economy, the moment you cut spending, the paradox of thrift kicks in, and the economy rolls over. This is a lesson Japan has learned all too well over the past couple of decades. Not believing Japan’s example, the U.S. repeated the error after the credit crisis of 2008. Thinking overspending was the cause of the problem, the U.S. government (led by the Tea Party) cut discretionary spending to the bone. Remember the 2013 budget sequestration? All of that hullabaloo caused the government to shrink from 2011 to 2015.

Whoa! That doesn’t follow the typical narrative of Obama as a spendthrift fiscally irresponsible President. Didn’t Federal debt balloon under his watch? How does that work? Well, the reality is much of the spending that caused the increase in overall debt was the result of automatic stabilizers - unemployment insurance, etc… Although Obama probably wanted to spend much more, he didn’t. And this is one of the reasons the U.S. economy experienced its weakest post recession recovery. Just look at that chart above. Over the past three decades there has never been a government spending decline of that magnitude.

Now I realize many of you will probably be saying “good - that’s what’s needed. The idea of increasing spending to solve a problem of too much debt is ridiculous. The reason for the anemic recovery is that we didn’t cut enough.” Which brings me to solution number two.

In an environment of over-indebtedness, the economy will naturally try to correct through the private sector paying down debt. But over the past half dozen decades, we have been muting regular business cycle declines through overly easy monetary policies. This has encouraged too much borrowing. We have piled more and more debt on the problem. The trouble is that we have done this for so long, the consequences of allowing the cycle to play out has become catastrophic.

Have a look at the total U.S. credit outstanding (minus financial firms) over the past few decades.

See the slight leveling off in 2007? That is the horrific debt de-leveraging that caused the greatest financial crisis since the Great Depression.

So far all those economists of the Austrian ilk, I acknowledge that if the government and the Federal Reserve would allow the natural business cycle to operate, we would have debt destruction that would cause the financial system to reset. After this event, the economy would be all set to grow again. Yet this reset would make the 2008 credit crisis look like a warm up. We would have 1930’s style breadlines.

I don’t buy for one second that the public has the stomach to sit through this type of event. Maybe when the problem of over-indebtedness was smaller, we might have done it. Perhaps in the 1980’s, or maybe even the 1990’s when Greenspan first brought the irrational exuberance problem to the fore, but not today. The pain that would accompany a true debt destruction reset would be too immense. The amount of social upheaval and instability would probably mean the end of the Western world as we know it.

We can’t grow our way out the debt problem, and we certainly can’t allow it to reset through a cleansing business cycle flush, so what’s the solution?

That leaves the one tried and true solution. For thousands of years when societies have gotten in trouble with too much debt, they have solved their problem by printing their way out of it. To think the modern day situation will be any different is naive.

Yeah, sure there will be moments when governments flirt with the idea of prudent monetary and fiscal policy. But those periods will be fleeting. Faced with moribund growth and a steadily increasing debt burden, at the first sign of trouble they will quickly turn on the presses and resort to the time old tradition of inflating away their debts.

Which brings me to the end game. There are many forecasts for a 2008 style collapse. The consensus is that eventually the debt burden becomes too big to bear, and the next Great Depression rolls in.

I don’t think that is how it plays out. Most traders hedge for the previous crisis. Visions of 2008 still fill the nightmares of investors. This explains why “gurus” like Carl Icahn have long presentations where they advocate hedges that worked so well in the last crash.

But what’s going to happen the moment things look dicey again? The governments and Central Banks will inflate. We saw it with BREXIT. We saw it with Eurocrisis of 2011. In fact, governments are becoming more and more quick to step on the gas pedal. They realize the costs of over inflating are far less than the costs of delaying.

Now you might have philosophical problems with these responses. For the longest time I railed on about the dangers of irresponsible monetary policies. It got so bad that on my ski trips, my pals banned me from talking about Greenspan’s reckless behaviour.

Yet today, I have come around to the idea that the debt problem is so pervasive, there is only way one forward - inflate. We are going to end up there anyway, so let’s just inflate away the burden and restart with a system that prevents this from ever happening again.

All of this talk is just that though - talk. As traders we need to concern ourselves about what is, instead of, what should be.

I don’t really care to argue about the morality of these decisions. The internet is filled with idiots shouting their opinions at the top of their lungs. The last thing you need is one more.

But I want to leave you with this idea. Given the enormous debt problem, the notion we will pay it back in real terms through growth, or even more improbably, the idea of allowing a massive debt destruction event to reset the system, is unrealistic. Any economic weakness will be met with more printing, and more stimulus. Maybe governments allow one or two quarters of weakness. It might even drag on for a year. But then as sure as day follows night, they will inflate again. They simply cannot afford not to.

They will do anything (and everything) to ensure the financial system doesn’t implode on itself. They will engage in massive Quantitative Easing programs. They will venture out to buy risky assets. They will even take interest rates to negative levels. It is only a matter of time before they are simply dropping cash right into individuals bank accounts.

I wish I could take credit for this, but it was Bill Fleckenstein who said it first. They will keep printing until the bond market takes the keys away.

Many market participants are worried about the economy rolling over. Although I understand it would cause some declines in financial markets, what would be the end result? Central Banks would ease, governments would spend, and they would find a way to prop everything back up again.

I am not smart enough to know if we are going to get another cyclical dip that is met with more easing over the next few quarters. If I had to guess, I would say this is probable - especially in the US. I am not predicting the medium term squiggles. But if this sort of decline were to occur, it would not be the big one.

The true end game won’t come from weakness, it will come from strength. What happens when economic growth picks up and causes inflation? Given the massive indebtedness, Central Banks will be loathe to raise rates enough to cool inflation. This will only cause more inflation.

Eventually we will hit a point where governments will be unable to raise rates because it would crush their balance sheet, yet inflation will dictate rates be higher. This will be checkmate. Governments will have no moves. Inflation will soar, the yield curve will steepen (to record wides), and the inflationary reset will be upon us.

The end game won’t come from a recession, it will come from a boom that gets out of control. I know that it a non-consensus minority opinion, but it’s always the story that no one is expecting that ends up being the problem.

Atlanta Fed Slashes Q1 GDP To Just 0.6%, Lowest In Three Years

Remember when the Fed was "data dependent"? Well, if the Atlanta Fed is right, Janet Yellen will have hiked the Fed"s interest rate in a quarter in which GDP has grown by a paltry 0.6%, down from 1.2% as of its latest estimate. If confirmed, this would be the lowest quarterly GDP growth in three years, since Q1 of 2014.

Incidentally, just over two months ago, the same forecast stood at 3.4%, it has since fallen by over 80%.

From the source:

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2017 is 0.6 percent on April 7, down from 1.2 percent on April 4. The forecast for first-quarter real GDP growth fell 0.4 percentage points after the light vehicle sales release from the U.S. Bureau of Economic Analysis and the ISM Non-Manufacturing Report On Business from the Institute for Supply Management on Wednesday and 0.2 percentage points after the employment release from the U.S. Bureau of Labor Statistics and the wholesale trade release from the U.S. Census Bureau this morning. Since April 4, the forecasts for first-quarter real consumer spending growth and real nonresidential equipment investment growth have fallen from 1.2 percent and 9.7 percent to 0.6 percent and 5.6 percent, respectively.

Visually:

And now back to those "animal spirited" soft surveys which have also been sliding in the past few months.

Iceland, You Won’t Believe It

By Chris at www.CapitalistExploits.at

Market dislocations occur when financial markets, operating under stressful conditions, experience large widespread asset mispricing.

Welcome to this week’s edition of “World Out Of Whack” where every Wednesday we take time out of our day to laugh, poke fun at and present to you absurdity in global financial markets in all its glorious insanity.

While we enjoy a good laugh, the truth is that the first step to protecting ourselves from losses is to protect ourselves from ignorance. Think of the “World Out Of Whack” as your double thick armour plated side impact protection system in a financial world littered with drunk drivers.

Selfishly we also know that the biggest (and often the fastest) returns come from asymmetric market moves. But, in order to identify these moves we must first identify where they live.

Occasionally we find opportunities where we can buy (or sell) assets for mere cents on the dollar – because, after all, we are capitalists.

In this week"s edition of the WOW: Iceland

The developed world is going to hell and probably deserves it. Today, I"m going to show you what should have been done both during and post the GFC. That it wasn"t, and now almost certainly won"t, is a problem for us all but that"s a story for another day.

Today, we look to Iceland and marvel at what they managed to accomplish both leading into the GFC and then coming out of it, and then we scratch our heads at the latest news just out from their central bank.

On with it then...

It was over a decade ago now when I very nearly took a flight to Reykjavik but at the last minute opted instead to go to Copenhagen, which I regret since I"m told it"s like Scotland on steroids (sounds like a blast). What clinched the decision in the end was that a scotch was about 3 times the price in Reykjavik, and since I was heading out for a wild boys week this was important in our considerations, though I"m told that in the land of fire and ice the women are indeed unbelievable.

Its history is that of an arctic backwater reliant on fishing fishing, energy, aluminium smelting, and tourism. A place with hardy living conditions and hardier people.

Between the late 90"s and 2008 they, however, went through what can only be described as a stratospheric rise from this backwater specialising in fishing to one which specialised in global finance.

Using the Irish financial model as a blueprint, Iceland decided to revamp its economy repositioning itself in the international community as a low-tax jurisdiction for foreign finance and investment.

Iceland’s big three banks - Glitnir, Landsbanki, and Kaupthing - grew exponentially as deposit rates in the teens meant investors could borrow in foreign currencies such as sterling, euro, and dollars and earn a significant spread on the yield differential investing in various bond issues from the Icelandic banks.

The influx of capital had the effect of pushing the Icelandic krona into the stratosphere, rising 900% between 1994 and 2008. So not only did investors make a massive spread on the yield differential but the capital appreciation on their investment alone was huge. A lot of people made a lot of money.

As so often happens when money is easy, banks went on a debt fuelled buying spree acquiring international assets and commencing outlandish developments such as the Harpa concert hall funded by Landsbanki and touted at the time as Europe"s largest glass building.

Harpa Concert Hall, Iceland

Things got so crazy that by the time the collapse came, triggered by the Lehman bankruptcy, Iceland"s banking system held assets worth 10 times that of the entire country"s GDP.

And THAT fact is, I believe, why today Iceland is faring relatively well.

Let me explain...

Too Big to Bail Out

The fact of the matter is that the banks were actually just far too big to bail out. Even if the Icelandic government had wanted to, they simply couldn"t bail them out... and so they didn"t. The CBI couldn"t possibly be the lender of last resort for a banking system ten times the country"s GDP and spread over many countries.

There was a lot of angst at the time and depositors lost their money. In an amusing side story Alistair Darling, then chancellor of the exchequer in the UK, used anti-terrorism powers to freeze Landsbanki’s UK assets.

I mention this just in case you"ve ever mistakenly thought that governments would never do such a thing to the private assets of a private institution from another country. You know... in a developed world country where the rule of law is, ahem, "sacrosanct".

In any event, there are 3 key aspects to why Iceland is today doing relatively well today:

1. They let their largest banks fail, and with it the stock market went from "oh my God, are you kidding me" expensive to "dear mother of Mary" cheap.

2. They let their currency collapse. Within days of letting the banks collapse, the krona (graph below) collapsed and over 80 percent of the financial system blew away in the Icelandic wind and almost all businesses on the island went belly up.

The stock market shown in the graph above fell by over 95 percent and interest payments on loans exceeded 300%. Whoopee! Can you imagine locking in a yield on a debt instrument at 300%? Over 60 percent of bank assets were written off within a few months after the banks collapsed and interest rates hit 18 percent in order to curb inflation.

3. And then they imposed capital controls

Pretty much all the things that every government economist said "shouldn"t" be done they did.

In between all of this they threw out the government in what was called the "pots and pans revolution".

Now, I suspect Paul Krugman will disagree here as what I"m going to suggest is both fact as well as common sense, a prerequisite if ever there was one for a conflict with Krugman"s ideas.

This is not my opinion. This is fact. This happened. Sure, there was the typical government doing the typical stupid things like trying to bail out smaller banks and such but in principal the system cleared.

Fast forward today and Iceland has come out the other side and here is what it looks like.

Unemployment rates after just 12 to 18 months began falling and haven"t looked back.

While Iceland let their banks fail they did take on loans from the IMF and others, which saw government debt explode higher (they took on about $10bn in debt - roughly the size of the country"s GDP).

And while I can"t say I agree with them doing so, the fact is that almost a decade later their debts are increasingly under control and falling relative to GDP. Why? Because the private sector was allowed to begin to grow again from a stable (un-indebted) base.

The economy has been growing steadily and is now the envy of their European cousins.

In large part Iceland let the system clear. They did so because they were forced to. I"m pretty sure that if they"d had the ability to bail out the largest banks and follow all the failed policies the rest of the developed world seems intent on doing, they would have. I"m just glad they didn"t, and today, I suspect most Icelanders would agree.

It"s not a perfect setup but it"s starkly different to how Western governments have dealt with the crisis and the results are telling.

So Here is the Question...

Having a free floating currency and watching it collapse 80% acted as an immediate release valve for Iceland. I"m not sure their central bank understands this. It appears not since they subsequently imposed capital controls, which was like locking the barn door after Flicker had already made it off into the starry night.

The other reason they seem not have understood its significance is because of this...

According to this article, they are now looking at pegging their currency to the euro.

"Iceland is considering pegging its crown to a major currency, most likely the euro, its finance minister said on Saturday, amid concerns the small North Atlantic nation"s economy risks overheating."

Pray tell, what jumping onto the deck of the Titanic hours before the band stops playing is meant to do for these fine folks?

What they"re looking for is an anchor of stability. Given that Iceland has no people and imports most everything except fish and sheep, they"re always going to have a currency that is susceptible to the gyrations of those commodities. Pegging currencies is plain stupid. All pegs eventually break.. They"d be better of pegging the krona to myrrh.

Let"s play a hypothetical game and pretend you"re in charge of the CBI... 

Cast your vote here and also see what others would do

- Chris

“Iceland instantly became the only nation on earth that Americans could point to and say, ‘Well, at least we didn’t do that.’ In the end, Icelanders amassed debts amounting to 850 percent of their GDP.” ? Michael Lewis, Boomerang: Travels in the New Third World

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Survey Says... Ignore The Hard Data At Your Peril

Authored by Michael Pento via PentoPort.com,

Surveys of both consumers and businesses show there is an extreme level of confidence regarding future GDP growth. Consumer confidence is now at its highest level since 2001. Small and medium-sized business owners, the driving force of growth in the economy, appear downright giddy; as the NFIB Small Business Optimism Index recently soared to its highest level since 2004.

The Philly Fed Index, a survey that gauges how well manufacturers are feeling, hit its highest level since 1984. Business leaders are betting on tax cuts, infrastructure spending and a scale-back of onerous regulations that will, hopefully, make America great again!

But just as we were beginning to get tired of all this “winning”, investors are also receiving a strong reality check from the actual hard data regarding the current state of economic activity.

The economy slowed more than expected in the fourth quarter of 2016. Gross domestic product increased at a lackluster 1.9 percent annual rate at the end of last year. For all of 2016, the economy grew only 1.6 percent, which was the weakest pace since 2011.

And despite all the good feelings about the current state of affairs, the Atlanta Fed’s GDPNow model, is forecasting real GDP growth (at a seasonally adjusted annual rate) in the first quarter of 2017 to come in at a pitiful 0.9 percent.

The hype regarding the potential implementation of Trumponomics appears to be creating a trenchant gap between today’s economic reality and hope about the future.

More evidence of this gap can be found in the January Durable Goods Report, which met expectations at 1.8 percent. However, excluding aircraft, transportation equipment fell 0.2 percent, well below the estimate of a 0.2 percent gain. Core capital goods showed a 0.4 percent decline in orders. This ends 3 months of strength for this reading and dispels the hope for a first quarter business investment boom suggested by the business confidence readings.  Unfilled orders were down 0.4 percent and have now fallen in 7 of the last 8 months--the deepest contraction since the Great Recession.

And we may need to start working on that wall right away if investors are to believe that confidence surveys will catch up with reality. Construction spending fell a sharp 1.0 percent in January. The consensus was for construction spending to increase 0.6 percent.

Personal spending increased only 0.2 percent in January, one-tenth below the consensus. This brings into question whether upbeat consumers are putting their money where their mouths are. Inflation-adjusted spending fell 0.3 percent, the largest drop since September 2009.

Also, Industrial Production for the month of February registered a big fat zero percent growth rate.

And how do you explain the recent drop in the CRB Index?  An economy that is rapidly expanding should see a rise in commodity prices. However, in the week of March 6^th; oil price dropped 8%, copper dropped 3.3%, and iron ore dropped 5%. This key growth index is down about 7% since the start of the year and has lost over a third of its value since 2014.

In addition, the latest data on department store and retail sales is alarming. Retail sales increased by just 0.1% in February, which was the smallest gain in the past 6 months. And Zerohedge reported that Bank of America data shows February department store sales fell about 15% yoy—the largest drop on record.

Yet despite any real evidence of actual economic growth, we have a stock market trading at all-time highs and a Fed that is determined to slam the brakes on “runaway” 0.9% growth.  The Republicans in congress are in a battle with Democrats and Libertarians over raising the debt ceiling; and they can’t seem to get out of their own way on health care and tax reform.

Hopefully, these employment and survey anecdotes are leading economic indicators that will turn out to have foreshadowed a leg up in GDP growth. Or, they could end up being the fleeting hiccups of hope in the new President that will end up sinking in the mire of D.C. politics. If the latter case proves to be correct, survey anecdotes will soon reconcile with the persistent anemic path of a sub-par and grossly-injured economy that has been beset by asset bubbles and debt.

The stock market has priced in perfection coming from the new Administration. Unless the Donald can put some tax and regulatory meat on the bones very soon, the stock market should suffer a huge fall.