6.9 C
New York
Friday, March 29, 2024

Credit shrinkage will continue throughout the recession and into the recovery

Credit shrinkage will continue throughout the recession and into the recovery

credit crisisCourtesy of Reggie Middleton of Reggie Middleton’s BoomBustBlog.com

The credit bust will be long lasting, and will harshly effect companies without strong business models – which is a lot more companies than many think due to the fact that a credit bubble has kept so many on life support. See Marginal companies with marginal business models are going to crack for my take on this.

Last month’s BIS Annual Report states "Aggregate statistics show a sharp slowdown in the growth of credit to the private sector starting late in the first stage of the crisis." The delay in credit restriction was misleading to many and masks the full effect or credit restriction.  The time lag stemmed from 1) forced balance sheet expansion due to off-balance sheet vehicle re-intermediation; 2) draw down of existing credit lines at favorable conditions by borrowers (these favorable conditions, and as a matter of fact the actual credit lines, are no longer availabe). The mounting and prospective losses that I have detailed in The Re-Release of the Open Source Mortgage Default Model and Green Shoots are Being Fertilized by Brown Turds in the Mortgage Markets outline (just in residential real estate lending, notwithstanding all other classes of lending) just how much more restrictive credit can get.

This portends less growth and expansion in the future (as in through the end of the recession potentially well into the tepid recovery), not more. As all regular followers of this blog have come to realize, US equity prices have totally and completely detached from economic fundamentals, thus this reality has not been factored into prices. When it does (this is a matter of when, not if), signficant price compressions (read as "crash") may ensue. In the meantime, starting in the middle of next week, I will be offering subscribers illustrative examples of methods that I am employing to reduce directional risk, a risk which fundamental investors such as myself gladly consume in normal times.

July 27 WSJ:

Lending continues to slow as bankers and borrowers refrain from taking risks, in a bearish sign for the economy.

The total amount of loans held by 15 large U.S. banks shrank by 2.8% in the second quarter, and more than half of the loan volume in April and May came from refinancing mortgages and renewing credit to businesses, not new loans, an analysis by The Wall Street Journal shows.

[loans]

The numbers underscore two related trends weighing on the economy. Financial institutions are clamping down on lending to conserve capital as a cushion against mounting loan losses. And loan demand is falling as companies shelve expansion plans and consumers trim spending to ride out the recession.

Treasury’s July Bank Lending Survey shows May lending results:

The May survey found that outstanding loan balances were flat in May and there was modest growth in new loan originations in the 21 banks surveyed.

The economic environment in May, against which banks reported their lending and intermediation activities, experienced further deterioration, despite modest improvement in a number of indicators.  That weakness is feeding into the financial system and credit markets and weakening overall demand for credit by consumers and businesses.

Related Articles/Posts
  • For those who actually drank t…
    We all know I have been warning of this bear market rally. I know it has been a rough ride, but at the end of the day, a dollar is a dollar and a loss is a lo
     
  • A Very Interesting Chart from …
    As those who follow my site know, I am still rather bearish on institutions that have any sort of levered exposure to residential, retail or commercial real
     
  • America, You have been outrigh…
    I dedicate this article to those loyal readers who tell me that there are times that you can’t rely on fundamentals. I respectfully disagree. Over time, 1+1
     
  • The two tailed banking crisis…
    From Mckinsey : From the first quarter of 2008 to the first quarter of 2009, quarterly noninterest revenue for corporate- and investment-banking acti
     
  • Beware of Bank Earnings Propag…
    If one were to parse the bullshit that the government has allowed the banks to proffer in the name of earngings, one would find the banks will probably b
     
  • Who are ya gonna believe, the …
    Everybody in the media says the worst is over, and we have visited a generational low in March. I say to myself, how in the hell do they know that? I know the
     
  • It appears as if Obama is gett…
    Everybody on this blog was explicitly warned about this in regards to Goldman. This weekend, I will go through some the other banks in granular detail, as well
     

 

 

 

Subscribe
Notify of
0 Comments
Inline Feedbacks
View all comments

Stay Connected

157,450FansLike
396,312FollowersFollow
2,280SubscribersSubscribe

Latest Articles

0
Would love your thoughts, please comment.x
()
x