Credit Growth About to Surge

By Callum Thomas

One of my favorite data series is the Fed senior loan officer opinion survey.  Hidden amongst the various questions and series of the report are some really useful signals and insights on both the US economy and financial markets.  Today we look specifically at commercial and industrial lending standards (the red line in the chart), and most importantly, how it seems to line up with commercial and industrial loan growth.

It makes economic sense that the two would move in line with each other e.g. looser lending standards are likely to be followed by increased uptake of loans… also, loan growth is likely to be softer when the economy is softening and spurring credit officers to tighten up standards.  So with lending standards easing further in the latest survey results, the outlook is for a surge in credit growth.  This interestingly enough lines up with our scenario of a US investment boom.

 

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Chart of the Week: Eurozone Credit Risk

By Callum Thomas

This week it’s a look at credit risk pricing in the Eurozone. This is a chart I’ve been using a lot in recent months, of course as of the last week it’s looking a bit more interesting now!  The reason why I’ve highlighted this chart in the past is that post-financial crisis, sovereign credit risk pricing did calm down, but to a new plateau.  In contrast, corporate credit risk pricing just got back to business down to pre-crisis lows.

The chart comes from a report on Eurozone equities, where I discussed the revised outlook based on changing signals from valuation, risk pricing, economic sentiment, and the earnings/macro backdrop.  I think this chart is certainly one of the key risk monitor charts investors should have on their radar.

Briefly, on the actual detail, the black line is European high yield credit spreads, and the blue line is the spread between the benchmark Eurozone 10-year government bond yield, and that of Germany.  For both indicators, I have taken the Z-Score in order to standardize them and put them on a comparable scale.

The reason I think this chart is so important, is firstly I would say that European high yield credit risk pricing is simply too complacent at these levels.  We know that obviously the ECB played a part here in that QE purchases of corporate bonds have artificially suppressed credit spreads.  But the key is the relative aspect (corporate credit looks too relaxed vs sovereign credit risk pricing).  And the final point to note, tactically speaking, is that flareups in these indicators can take some time to play through, so it’s probably too soon to call the all clear on the current flareup.

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Nobody Thinks it Would Happen Again

By Doug Noland

WSJ: “Ten Years After the Bear Stearns Bailout, Nobody Thinks It Would Happen Again.”

Myriad changes to the financial structure have seemingly safeguarded the financial system from another 2008-style crisis. The big Wall Street financial institutions are these days better capitalized than a decade ago. There are “living wills,” along with various regulatory constraints that have limited the most egregious lending and leveraging mistakes that brought down Bear Stearns, Lehman and others. There are central bank swap lines and such, the type of financial structures that breed optimism.

March 17, 2008 – Financial Times (Gillian Tett): “In recent years, bankers have succumbed to the idea that the credit world was all about numbers and complex computer models. These days, however, this assumption looks ever more of a falsehood. For as anyone with a classical education knows, credit takes its root from the Latin word credere (“to trust”) And as the current credit turmoil now mutates into ever-more virulent forms, it is faith – or, rather, the lack of it – that has turned a subprime squall into a what is arguably the worst financial ­crisis in seven decades. Make no mistake: what we are witnessing right now is not just a collapse of faith in one single institution (namely Bear Stearns) or even an asset class (those dodgy subprime mortgage bonds). Instead, it stems from a loss of trust in the whole style of modern finance, with all its complex slicing and dicing of risk into ever-more opaque forms. And this trend is not just damaging the credibility of banks, but the aura of omnipotence that has enveloped institutions such as the US Federal Reserve in recent years.”

Continue reading Nobody Thinks it Would Happen Again