Macro Monkey Says
C&I or Die
People who do work that feels important but isn't actually (wonder who that could be) often like to say things like, "well, it's not like we're performing surgery." Well, in this case, we kind of are.
Except, in our case, the patient isn't some 54-year-old father of three getting his appendix removed. Our patient is the +$23tn hoard of goods and services that the U.S. has turned into the most powerful and dynamic economic machine the world has ever seen.
So, why are we performing surgery on this big, beautiful economy? Because even supermodels get acne.
In actuality, the reasons are obvious. Hindsight is 20/20, but I think deep down, even the most "live-by-the-hype, die-by-the-hype" investors knew there would eventually be a reckoning to come after a +10-years of ZIRP.
And that's exactly what the last year has been, thanks to JPow and his 475-bps adventure. The question facing investors now centers around whether or not we're on the way out of that reckoning or just getting started.
Going by equity prices, you might think we're on the way out. But, according to a recent report out of Bank of America, the "real" economy still matters.
And when I say real economy, I, of course, mean construction and industrial (C&I) loans issued by (mostly) small and medium-sized banks.
According to Bank of America, the net percentage of banks reporting tighter standards for issuing C&I loans has exploded from roughly -20% to nearly 50% in a period of just over 6 months. According to the chart below, growth like that is far from a good sign for those still holding out hope for a "soft landing."
The market for C&I loans is almost a $3tn engine to the economy. When a bank issues a loan to a developer looking to build, say, new apartment units, there's an enormous amount of economic activity created. Prime examples include:
- Hiring workers to take part in the construction
- Hiring developers, architects, consultants, engineers, etc., to plan the building
- The bank paying people to underwrite the loan
- Those working on the building contributing to the local economy
- When finished, landlords collecting rent from the tenants in the building
- Ongoing living expenses like utilities, maintenance, etc., etc., etc.
You get the point. Yeah, the size of the loan market is just under $3tn, which seems massive in itself, but greatly understates the true economic impact sparked by these loans.
Moreover, C&I loans are like the #3 batter in a small/mid-sized bank's lineup. First, there are checking and savings accounts, then mortgages, then C&I loans step up to the plate. When the other two strike out, C&I better step up, or the inning is over.
With 30-year fixed rates at +6.5% and $300bn of checking and savings deposits fleeing to money market funds in the last two weeks alone, it sure seems like it's C&I loans' turn at the plate. Considering the tightened standards, this is something you're gonna want to keep on your radar.
So, we're definitely performing surgery, as your cocaine / adderall laced hands clearly can't hold still, but ensuring the C&I loan market doesn't utterly collapse like in '08 will be key to the soft vs. hard landing debate if that's still a thing.