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ΓΏ Yardeni does great work providing banking
charts.
CHART REVIEW
My overall conclusion is that we are still pumping air
into the Credit Bubble. All Bank Credit on page 2 shows $6.5 Trillion
from banks and still growing.
William Tamblyn points out the growth in Real
estate to $2.3T p 12 and Home Equity lines to $.3T p 19. There is an
equivalent amount from the Government Sponsored Enterprises of Fannie and
Freddie pouring into Real Estate. So naturally we see the self supporting Real
Estate rise which then encourages more borrowing and lending in real estate,
etc..
Banks have had money in excess of their loans and
purchased "securities" p 14 up to $2T, a huge chunk of which are US
government debt (Treasuries) keeping liquidity up, and interest rates low. Bank
borrowing is growing as part of the Credit Bubble, because interest rates are
low and they can make money on real estate and longer term Treasuries. This is a
macro view of borrowing short to lend long, a carry trade, that is very risky if
rates rise.
But the weak link is that Business are not
borrowing to expand, and are even paying down their credit. On p 11,
the Commercial and Industrial Loans are dropping now to .85T. Combining with the
Commercial paper the chart on p 20 is the most scary for economic recovery and
jobs growth: is shows a drop from $1.4T to $1 T. The reason is that US labor is
uncompetitive with the world market, making return on investment unattractive in
the US. Thus there is negative borrowing for business investment in the
US.
CONCLUSION
The conclusion is that the economy has been holding up by
expanded real estate loans to let households continue their lifestyles of no
saving and continued spending, but that Business are contracting, paying down
debt. Financial institutions have prospered in making Real Estate loans and
buying government securities while paying little on deposits.
PROJECTION
My projection is that the unsustainable Credit Bubble
implodes. It is just starting with the weak dollar over the last two years.
Interest rates rise hurting real estate
The nearby rise in interest rates will completely stop the
rise in mortgage lending; first in refinance because when rates rise there is no
refinance advantage, and then in affordability to buyers that can't qualify at
higher monthly payment for higher interest rate loans. We are in the last
stages of the real estate bubble that is funded by the Credit Bubble. Real
Estate will stop rising as there are fewer buyers. Look at REIT prices in
April, and Refinance rates for evidence this is starting.
The Carry Trade hurts financial markets
Then the Financial Institutions get caught as rates rise
across the board. They must reborrow as each low cost short term loan comes due,
and their long term lending is not refinanced as rates rise across the board. if
hedge or bond funds had leveraged their carry trade, they must unwind in swift
unpredictable spikes of interest rates. Ditto for all the derivative issuers of
insurance to the Fannie and Freddie portfolio risk derivatives. Rate rises
will be fought by the Fed. The Fed has been slow to admit there
is rising inflation and weaker dollar from too much liquidity, and has
already done about all it can with 1%. They will be forced by the market to let
rates rise with inflation. Their delay in action has already allowed the Credit
Bubble to expand beyond where inflation and weaker dollar can be
avoided.
International
Foreign Central Banks will pull back their support
of the dollar and US interest rates. (The charts are not in this part of
Yardeni's work.) This relates to trade deficit, price of oil, and government
deficit, Iraq war, Bank of Japan, all of which are negatives for interest rates
and the dollar.
Stocks
Higher interest rates decrease the P/E multiple acceptable
to stock investors, so while the US economy may continue to slowly grow and
corporate earnings be squeezed up, especially from the success sectors of
Natural resource companies, entertainment, technology, and agriculture; stocks
do not rise.
So what does rise? Physical commodities like gold and oil.
As the dollar falls interest rates will rise.
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