Wells Fargo’s CEO, John Stumpf, was quoted this week saying his bankers are having trouble finding qualified borrowers. “We have a ton of liquidity,” Stumpf observed, but “finding qualified borrowers is impeding lending.” Is it any wonder, after bailing out these banks with government money, that people are appalled that the banking system is now part of the problem?
Bank loan growth declined at a 10% annual rate in Q1, the fifth consecutive quarterly drop. Over the past year, commercial and industrial lending has declined 16%. So after the “shadow banking system” collapsed, leaving only the newly-rescued traditional banks to vie for the remaining customers, banks are now having a tough time finding new customers who need to borrow money. Hard to believe, isn’t it!
In fact, the economy is desperate for the liquidity to which John Stumpf has been clinging. While he pays borrowers nothing, ratchets up lending rates to several points above prime, shrinks his lending base but notches higher profits for doing less work, the U.S. economy gasps for breath.
To be fair to my readers in banking, the point of this rant is that it is not the individual banker’s fault, but it is clearly a systematic banking problem; the fault lies squarely with the banking system. It is not the price of money which has shut down the system. The banks’ cost of money is essentially zero. But regulators have turned off the spigot, fearful that a dehydrated economy may result in bad loans somewhere down the road.
It is not a lack of borrowers, or even qualified borrowers, that is the problem. The problem is that our lenders are tightening standards and transforming performing loans into bankruptcy filings, forcing customers out of the bank portfolio when loan agreements mature knowing full well that borrowers are unable to refinance the debt in this environment.
From an investors point of view, the bottom line is that money is still very “tight.” The Federal Reserve left the punch bowl at the party until everyone on the block was drunk. Finally, the capital markets locked up. The Feds have practically declared that money is FREE, however the strings that are attached to this handout are so stringent that no one (except the U.S. Congress) has been deemed “qualified” to borrow money.
Somebody needs to march over to the Treasury Department and knock some heads together. We’re still letting the inmates run the financial asylum. Freddie Mac and Fannie Mae are tightening lending standards.
Why? No one cares what they think! They’ve proven that they don’t know anything about making credit decisions. Someone needs to tell them that investor-owned condominiums are far preferable to boarded up, empty shells. Having saved his buddies at Goldman Sachs, Treasury Secretary Geitner needs to tell his bankers to roll over existing loans, as long as they are performing.
This economy is slowing down, and the core of the problem is in our financial system. Banks are shrinking the customer base rather than stepping up to fill in the void left by the financial sector collapse.
- Money supply growth is barely positive, signaling difficult times ahead.
- Small business borrowers are hurt the most.
- The National Federation for Independent Businesses “Optimism Index” has been declining, from already appalling low levels.
But who would grill the Congressmen?
Thankfully, there are some signs of life that have kept us moving forward. Retail sales have rebounded from the 2008/2009 lows. Americans are an optimistic bunch. Surveys about customer spending attitudes are among the statistics that signal a recovery is possible, if not immediately imminent.
The Baltic Dry Index shows that the economic recovery overseas is progressing in spite of us. For similar reasons, I suspect, energy demand continues and the U.S. rig count continues to recover. If the recent ill-advised moratorium on deep water drilling continues, it probably means additional drilling in less bountiful regions, but more drilling activity overall.
Business orders are up as well, and corporate profits have been surprisingly strong, but for the wrong reasons. By laying off workers, companies have enabled a bit of a profit recovery. This is not the sort of recovery that can be maintained, however businesses have clearly exercised tremendous financial discipline in the face of these economic tribulations. As a long-term business strategy, however, it stinks.
The biggest surprise when I updated the May-Investments Leading Economic Indicators this month was the strength in the technology sector. Semiconductor billings for the month of April not only returned to 2007 peak levels, but in April the level spiked up to about 2 ½ times the normal level of billings.
The number was so strong that you have to wonder if it’s a bad data point. Can it continue? If it does, what does it mean for the tech sector? Is the global recovery really driving technology sales that strongly? More ominously, will this level of production result in an inventory build-up if final sales can’t match the additional output? Electronic retailer, Best Buy, reported disappointing sales this week. It might be an unfortunate time to be rebuilding inventories.
Overall, the economic activity, especially global sales, has been surprisingly strong. While we believe that the markets are incredibly risky right now (which explains why so much of our portfolio sits on the sidelines), we are pleased to see as many signs of economic strength as we do. They are weakening, generally, but this is a great country and a strong business structure. The economy is bending, but not yet broken.
This month’s review of our economic indicator neither gives me the ammunition I need to put a “bear market” fund in the strategy, nor does it give me the confidence to add risk back into the portfolio.
We are in wait and see mode, with a stash of cash on the side.
My recommendation? Go out and buy a new TV so you can watch it all unfold in brilliant color. This economy needs some help.
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.
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