That sinking feeling

The approaching doldrums of the U.S. economy

From Tuomas Malinen’s Forecasting Newsletter.

• The U.S. corporate sector is already in a recession.

• Inflation expectations are spiking, and more shocks are likely to be on their way.

• The U.S. is slowly sliding into a recession, which is likely to morph into an outright collapse.

On Wednesday, the Federal Reserve dropped a bombshell, when it announced that it will NOT continue the Bank Term Funding Program (BTFP) beyond March 11. I am keen to not to believe that this eventually come to be. This is because the silent bank run shows no signs of abating. While this week did not see such a deluge of borrowing from the BTFP than past week, U.S. commercial banks still borrowed over $6 billion from the facility, which is the highest weekly-figure since mid-December (in addition to past week). It will be interesting to see, what next week brings, as the current data does not cover borrowing after the announcement of the Fed.

I, naturally, can be wrong about this, but it’s certain that the Federal Reserve is playing with ‘fire’, by removing the very facility which has kept banks coping with the deposit outflow and other pressing liquidity needs. The members of the Fed may think that, because the most acute phase of bank runs seems to have abated, signalling return to normality would bring calm. However, the U.S. banking sector is pretty damn far from being normal or “ok”.

For example, the Kobeissi Letter summarizes the extreme situation with commercial real estate (CRE) loans, by noting that 14% of CRE loans and 44% of office building loans are now in negative equity, which means that the value of the underlying asset is below the value of the loan used to finance it. The U.S. banks hold over $2.9 trillion of CRE debt, which is over 13% of their overall assets, and more than 128% of their equity.

So, like I’ve been touting, the banking crisis is very far from over. Like I’ve also been saying, recession is likely to be the event that truly pushes it into motion. The onset of U.S. recession is also much closer than many of the “analyst talking heads” are saying. To note, while the U.S. economy grew by $329 billion in Q4, federal deficit grew by $510 billion. Without the massive fiscal stimulus, the U.S. would, most likely, be in a recession already.

Let’s take a look, where the U.S. economy (truly) stands.

The lending recession of corporation