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Friday, July 10, 2015

Well -

The May wholesale report is disturbing. The journalistic take on this is good, but I can't figure out why. There is a high statistical error in this report, so you always look at the YoY, and it is horrible. YoY sales, non-adjusted, were down 6.8%, and inventories, non-adjusted, were up 5.1%. Nothing to cheer, but rather something to fear. YTD sales were negative YoY. This hurts.

I see perhaps some slight turn in rail, which is impossible to tie down due to calendar effects this year and will have to wait 2-3 weeks for confirmation. So I am not willing to call it yet.

But either May was the low or that's it. We may actually be in a recession. If we are, it should be somewhat mild, but rather enduring. 

If you combine the June NACM CMI with the Wholesale report, cursing ensues. June CMI shows financial pressures deepening, not loosening, and we are very close to the point at which the feed-in effect becomes a much stronger negative. 

This is what I am looking at:

 Collections are worsening, more and more credit is being extended, and now BKs are going south. In June, we were still seeing a diffusion of financial pressures rather than an amendment. So either this is the low or it's a slow grind down. Note that this is the combined. 

Again, I am not willing to call it because more credit is being extended to mfrs, with the obvious hope that carrying them through will get everyone through the rough patch. But the accompanying degeneration in collections factors indicates that either it turns swiftly or more credit will be cut in the next couple of months. 

There is also a clear diffusion of financial stress into services, which is the factor that affects jobs the most. 

This is either a mid-cycle growth recession or a recession, and we will probably know toward the end of August. 

The fundamental mechanism of this situation is really higher debt loads for businesses accompanied by lower incomes for consumers after necessities. The drop in oil prices did help consumers, but doesn't come close to redressing the accumulated deficit from health insurance/food pricing alone. 

A degree of stiffness in the interactive economic network has developed - companies have a hard time lowering prices because of low excess cash flow, but consumers have a hard time paying prices! In addition, a stronger dollar and poor global growth circumstances don't help at all, so the exits are pretty well blocked and everyone just has to shuffle around in the given space doing what they can.

I am waiting for Singapore Q2 GDP which will be published next week. South American growth is slow, India is hardly busting out of the gates, and the Asian economies are beginning to experience further knock-on difficulties from China's situation. 

The oil patch should be past its low, but I am not sure that motor vehicles will hold up. 

One factor which I have not seen discussed is that the inevitable effect of the Chinese swirl-down-the-drain exercise must be to raise the yen. 

If I were the Fed, I would still raise rates nominally. In this situation, more credit is needed. It is obvious that it must come externally from the B2B account network. Banks sitting on portfolios with low yields are going to push money out the door if they think rates are going up. Because you MUST. In that situation, it's write new loans or die a slow death. 

In banking - commercial banking, which I think the Fed hardly remembers any more - there are two hard and fast rules. In a low interest rate environment you manage to minimize total risk. In a high interest rate environment you push money out the door trying to increase your total loan portfolio, and business loans are really favored, because they roll and rates are rapidly adjustable. To some extent Main Street bankers are already doing this - witness the drop to 4.8% in May from 5.3% in January in short-term rates on loans reported in NFIB's survey. You have to keep it going.

It may seem like a paradox, but a couple of nominal interest rate increases this year would actually increase the flow of credit on Main Street, and that's what this economy needs. Specifically, doing that would increase lending to small businesses, and that's where the life is right now.

I think the "first" "comment" above is actually spam. (And, written by someone not-quite-familiar with English verbs.)

It could vanish. Just saying. And then MY comment would be irrelevant, and it could vanish, too.

It has been dispatched into the dustbin of Blogger history, but you, O Sentinel of Commentary Integrity, must remain standing in solitary pride as a memorial to its miserable, short life.
MaxedOutMama - Theoretically you are correct, that raising rates will cause increased commercial lending. This rate hike cycle will be different than any other rate hike cycle. Interest on Excess Reserves has to go up for the fed to bring up the fed funds rate. Reverse Repos and IOER allow for a narrow window for the FFR to fall into. I think raising rates during this cycle will be slower, lower, and possibly nonexistent compared to other cycles. Seems to be quite a bit of negative externalities in foreign markets by raising rates. Also may see increased political risk as rates increase and the fed is paying more interest to banks in the form of IOER instead of to the treasury.

The fed looks to be in a tough spot. I tend to favor waiting to raise rates and allowing some of the excess reserves to flow out now. Inflation is still under target and I don't see increased lending from a rate increase. Raising rates will likely increase the value of the dollar even more and will hurt corporate profits. This will put downward pressure on US equity prices. The ECB, PBOC, and BOJ are all easing their monetary conditions. Is the Fed really ready to tighten as they ease?
Yes, the Fed is in a very difficult position, and one thing everyone agrees on - rate increases, whenever they should come, will be very slow and very low. We are not going to rebound to normal rates, or anything close to it.

The problem is that if you don't increase lending, those excess reserves are non-functional.

The response among the small banks even to the threat of a rate rise this year was to crank up NIM, which in this environment you do buy writing more loans:

It's the very small banks which will shove the money out the door:

YoY SA Deposits are growing faster at small domestics than they are at large domestics, and YoY Loans and Leases are growing much faster at small domestics than at large domestics.

The net economic return on a lot of these loans is huge, because they push money through small or local businesses.

ALL the current life in this economy appears to be on the bottom end. That is where the Fed has a handle, and perverse as it might seem, raising rates is going to produce more loans to businesses and individuals. It will be interesting to see the next NFIB.

There's a natural swing between small/large banks and there's a natural swing between small/large business, and sometime over the past year we seem to have crossed that line.

I don't mean to bang on a rusted kettle drum, but the small banks have much less drag in the form of bad loans than the large banks, and the small banks don't get into any of the funny business produced by the end of Glass-Steagall. They are pure commercials, which just about none of the entities owned by the GLB holding companies are any more. This means that in an environment where we rebound off the bottom of rates, THEY HAVE TO LEND. And they're actually good at doing it.

You are never actually tightening if you can crank up the lending base, no matter what the theories say.

You did give me an idea for a further post - thanks for the comment, and here's hoping the Fed can thread this needle. This is a rather unsettled international environment.

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