On Friday afternoon, the Fed released the H.8 Assets and Liabilities of Commercial Banks data. The numbers look terrible. The Fed has flooded the banks with funds and the banks have pushed it back to the Fed.
Commercial and Industrial loan figures continue their downfall.
Loans and leases have flatlined.
This signals to me that the Fed has failed to spur the banks to lend. The Fed printed absurd amounts of money and gave it to the banks, yet the banks have pushed the funds back to the Fed through the reverse repurchase (repo) market.
This has caused the repo market use to skyrocket. Its use continues to be at elevated levels.
Quality collateral is becoming scarce. Banks want short-dated treasuries, not dollars. They participate in the repo market to get their needs met. These are the charts that the Fed doesn’t want to look at.
Not only are the banks not spending money, consumers are stuffing the banks with their cash as well.
Bank of America had anticipated that these funds would be spent when a “sunny day” came along. I’m wondering now when that sunny day will arrive. These additional funds are reflected in the numbers as elevated personal saving rates. After hovering around 7% for a decade, American’s personal saving rates have risen considerably.
This is nightmare fuel for the Fed. Try as they might, they will be powerless to stop the downturn that is coming. What the Fed fails to realize is that they have created a failure of epic proportions.
They’ve suppressed interest rates for so long that they have distorted the banks’ incentives. Now they’ve printed a ridiculous amount of money and flooded the system with it. Banks are starved for yield yet, the banks know that if they borrow short and lend long, they will earn a negative return. This is because “real” interest rates are negative. What is the “real” interest rate? That would be the market rate minus the inflation rate. Below I’ve plotted the 10yr and 30yr treasury rates minus the CPI to give us an idea of what the “real” return for a bank would be.
It’s no wonder the banks don’t want to lend. It’s a losing proposition! This is why the repo market looks so good to them.
I was immediately curious how this compares to the 70s, lo-and-behold;
The 1970s and the early 80s both had a bout of negative “real” rates. This was a terrible time for the Nasdaq and a tremendous time for gold.
Typically, during a recession inflation will fall. This is because there is a demand to hold cash balances. This demand had been suppressed during the boom phase of the economy. Firms that have inventory will discount it to raise cash. There is low wage growth and increasing unemployment. Commodity prices drop due to reduced demand. Asset prices fall, especially the stock market and the housing market. The problem is, this will not be a deflationary recession. Businesses are hovering around all-time lows for their inventory to sales ratio. Wage growth is happening and there is a great demand for employees. Commodity prices are up and rising. Asset prices are reaching nosebleed levels. We are in the upside-down world which means we’ll see a recession and inflation. Buckle up, the ride back to the 1970s could be a bumpy one.
Important and Potential Market Moving Events
This Week
5.30am Housing Starts and Building Permits (June)
Wednesday, July 21
4am Mortgage Applications (16/June)
Thursday, July 22
5.30am Initial and Continuing Jobless Claims
Friday, July 23
6.45am Markit Manufacturing, Composite, & Services PMI (July)
This is very good commentary. Reminds me some of the late Robert Wenzel.
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