US Banks Inflate A Raging Credit Bubble On Weak Economic Growth

Lending not related to financing securities holdings continues to soar, reaching another new high in July. The growth rate of loans excluding repo and other loans on securities collateral continues to hover around 8%, where it has been since Q3 of 2015.

The credit bubble has actually heated up since July 2015. The economy slowed over the same period. The data we collect in real time on Federal tax revenues (updated Pro Trader Federal Revenues later this week) told us that the economy had slowed and subsequent, revised GDP data has confirmed that. However, July tax collections have rebounded strongly, suggesting that the US economy may be heating up. If this trend persists, it will encourage the Fed to tighten, and would possibly lead to an uptick in the lagging and suppressed official gauges of inflation.

8/22/15 – Bankers are counting on a growing economy to keep the loans they have issued for the past few years from going sour. A growing bubble can hide a multitude of sins. Once that growth stops, those sins are uncovered in the form of non performing loans and they can wreak havoc.

2/18/15 – These are non-financial loans to businesses and individuals. The recent parabolic rise suggests a bubble that may be blowing off. However, the increase in bank lending has not seen a corresponding uptick in US economic growth based on the GDP data. The annual growth rate in GDP was actually higher a year ago when loan growth was less than half of today’s growth rate. So much for the theory that tight credit was holding back growth. Like most economic theories, there’s no support for it.

3/19/16 – So what’s going on with that? How can loans be rising so fast and the US economy slowing toward stall speed? Look what’s happening with Commercial and Industrial Loans. They are soaring at an 11% rate.  But that money is not going toward investment in the expansion of business. Too much of it is being used for financial engineering, as corporate executives use the funds to buy back their stock options, thus lining their own pockets while artificially boosting stock prices.  This will ultimately end badly, but the question is whether it will be successful in extending the current regeneration of the bubble in equities by another year or two.  That’s an issue for technical analysis to address.

As the economy weakens, Commercial and Industrial lending continues to grow at an annual rate of +9.5%. That’s astounding because we know that the growth rate of business investment in the actual business is growing at the rapid rate of… wait for it… -0.5%, according to the Atlanta Fed’s GDP Now model.  That’s actually better than it was in Q1, at -2.0% (chart below). The persistent growth of C&I loans of 9-11% this year can only be attributed to ongoing financial engineering schemes. The growth rate has slowed since early 2015, but it is still extremely high, particularly in relation to fixed investment.