Bidenomics, which is also Yellenomics (the former Fed Chair and current Treasury Secretary) has The Good, The Bad and The Ugly to say for it.
First, The Good! The Atlanta Fed’s GDP Now real time GDP tracker has Q3 GDP at … 4.12%. Pretty good, but bear in mind that there is still more than $8 trillion in Fed Monetary Stimulus outstanding (aka, Yellenomics).
Second, The Bad. Bank credit growth is now negative.
As lenders are tightening credit standards for commercial and industrial loans.
The ugly? There are several candidates for this dishonor.
One, The Conference Board’s leading economic indicators is down -10.
Two, REAL median weekly earnings growth remains negative at -3.57% YoY.
Third, auto loan and credit card balances are at $1.5 TRILLION making further consumer credit more difficult to finance GDP growth.
Fourth, Real Gross Domestic Income growth was negative in Q1 2023.
I could go on and on about the negatives of Bidenomics (e.g., massive distortion of Federal spending towards green energy and big donors). Isn’t the earth moving closer to the Sun in its elliptical orbit?? HOW is spending trillions on green energy work as we move closer to the Sun??
During the COVID-19 pandemic the occurrence of remote work jumped, out of sheer necessity. The technology was already available, but the pandemic accelerated its adoption and bypassed the hesitation of employers to allow people working from home. In many cases, remote work has been successful and therefore seems to have become a permanent feature, often in hybrid form. For employers, it has become an employee benefit to attract people in a tight labor market and it saves on office space costs. The flipside of the latter is that demand for office space has seen a structural downward shift. It is estimated that the underlying value of office space in New York City has permanently declined by 39%. This suggests that at current prices, there is a bubble in commercial real estate. In this special we are particularly interested in the implications for financial stability and the economic outlook. First we take a look at the development of commercial real estate prices and commercial real estate lending. Then we discuss the Fed’s recent stress test on large banks that included a large decline in commercial real estate prices. In contrast to the Fed’s exercise, we show that distinguishing between large and small banks provides a sharper picture of the vulnerabilities in the US economy. In particular, the connection between commercial real estate and small banks, through commercial real estate lending, could pose a threat to financial stability and make a recession worse.
Commercial real estate heading south
If we plot the BIS commercial real estate price index, it is clear that since the Great Recession, commercial real estate (CRE) prices have more than doubled in nominal terms (the blue line in Figure 1), but have moved sideways since 2021. This suggests that prices have reached a plateau. However, in recent years inflation has obscured the movement of CRE prices in real terms (the orange line), which shows a peak in 2021, but since then there has been a decline, almost to the level during the COVID-19 pandemic. In other words, CRE prices are already failing to keep up with inflation. Is this an indication that the CRE bubble is already deflating? With nominal CRE prices remaining elevated, most of the nominal price correction is likely still to come. If the 39% estimate by Gupta et al. for New York City is representative for the entire United States, we are heading for a major decline in CRE prices.
We can also plot the BIS index against CRE lending to show3 that rising prices for commercial real estate sparked a credit boom in commercial real estate (Figure 2). Given the academic literature linking financial crises to credit booms and busts, this should be cause for concern. Moreover, Minsky (1986) notes that an emphasis by bankers on the collateral value and the expected values of assets (instead of cashflows) is conducive to the emergence of a fragile (as opposed to a robust) financial structure.
If excess demand for office space pushed up commercial real estate prices, and if that increased CRE lending by banks, what does a structural downward shift in demand for office space mean? If CRE prices are deflating, what does that mean for the indebted CRE sector? Is this going to lead to defaults? And what does that mean for the banks that did the CRE lending? Is the deflation of the CRE bubble a threat to financial stability? Also note that due to the steep hiking cycle by the Fed, some companies in the CRE sector may find it difficult to refinance their loans at substantially higher rates.
We can dig deeper by looking at the demand and supply developments in CRE lending. If we look at the Fed’s SLOOS data (figure 3), it is clear that demand for CRE loans strengthened especially between 2012 and 2017. Lending standards loosened between 2012 and 2015. This era coincides with a strong rise in the CRE price index, which may have motivated banks to expand CRE lending. Demand for CRE loans weakened during the pandemic, then bounced back as the economy reopened, but headed south again in 2022. Loan standards tightened during the pandemic, then loosened again when the economy rebounded, but have tightened since 2021. In other words, there seems to be a correlation between CRE prices and demand and supply developments in CRE lending. Currently, both are heading south, if we look at CRE prices in real terms and CRE lending in terms of net demand. It seems that rising CRE prices sparked a credit boom in CRE and now that the CRE price bubble is deflating, the CRE sector has less appetite to borrow and banks are tightening their lending standards.
The Fed’s incomplete stress test
CRE prices are falling in real terms and credit for the CRE loans is tightening. Does this pose a problem to the economy? Not if we believe the Fed’s June 28 press release that accompanied the annual bank stress test. The stress test looked at “a severe global recession with a 40 percent decline in commercial real estate prices, a substantial increase in office vacancies, and a 38 percent decline in house prices. The unemployment rate rises by 6.4 percentage points to a peak of 10 percent and economic output declines commensurately.” However, according to the Fed “all 23 banks tested remained above their minimum capital requirements during the hypothetical recession.” Therefore, the central bank concluded that “large banks are well positioned to weather a severe recession and continue to lend to households and businesses even during a severe recession.” However, one line in the press release reveals the main problem with the Fed’s stress test: “The banks in this year’s test hold roughly 20 percent of the office and downtown commercial real estate loans held by banks.” So where is the remaining 80%? If the stress test considers a huge decline in commercial real estate prices, it might be relevant to know how this affects the banks that hold 80% of the CRE loans made by banks. Therefore we take a closer look at CRE lending by large and small banks in the next section.
Bank lending: large vs small banks
We already saw in figure 2 that the rise in CRE prices until 2022 was accompanied by an increase in CRE lending. However, there is more to this story of we take a closer look at who has been doing the lending. So far we looked at aggregate bank lending to the CRE sector, without distinguishing between different types of banks. However, a closer look at the banking sector reveals a disturbing vulnerability that could be a threat to financial stability.
The Fed data on commercial banks distinguish between large and small banks. Large domestically chartered commercial banks are defined as the top 25 domestically chartered commercial banks ranked by size. Small domestically chartered commercial banks are defined as all domestically chartered banks outside of the top 25. Note that according to this definition a bank of say $80 billion would still be considered ‘small.’ In figure 4 we show how CRE lending has evolved, distinguishing between large and small banks.
It turns out that CRE lending by large banks has hardly increased in the last 15 years, while at the same time CRE lending by small banks has more than doubled. In other words, the growth in loans to commercial real estate has come from small banks. In fact, small banks have taken over the role of main provider of commercial real estate loans. Therefore, the Fed’s stress test omits the most relevant part of the banking sector for commercial real estate. While commercial real estate lending by large banks has remained stable since 2006, commercial real estate lending by small banks has increased rapidly. We could even talk of a credit boom in commercial real estate loans provided by small banks.
Whether the increased share of CRE lending by small banks is a problem also depends on the relative importance of CRE loans for small banks (Figure 5). FDIC data (Quarterly Banking Profile) distinguish at least three classes of asset size: more than $250 billion, $10-250 billion, and $1-10 billion. The first class contains only large banks as defined by the Fed stress test, the second class is a mix of large and small banks, the third class only contains small banks. While for the largest banks, CRE loans were only 5.7% of total assets in the first quarter of 2023, for the smallest banks this is 32.9%! For the intermediate-size banks the CRE loans are 18.4% of assets. So not only is 80% of the CRE bank loans made by small banks, these loans also make up a much larger fraction of the balance sheet of small banks.
Finally, it is important to note that small banks are regional banks. In fact, the US has so many small banks because for much of its history it was difficult for banks to open a branch in another state. This legislation has been abolished, and the amount of banks in the US has fallen, but there are still many small banks with predominantly regional clients. This means that CRE risk in small banks is also regionally concentrated. Instead of a diversified nationwide CRE loan portfolio, a small bank tends to make loans to local borrowers. Consequently, if commercial real estate in a region turns sour, the small banks in the area will be highly exposed. Bubble or not, any adverse development in the CRE sector is going to hit small banks harder than large banks.
The commercial real estate-small bank nexus brings together two vulnerable sectors that could rapidly deteriorate in a self-reinforcing loop. Small banks have already shown vulnerable to higher interest rates and deposit outflows in March and commercial real estate is high on the list of financial stability concerns of US regulators. We have shown that the two sectors are critically connected and in the next section we speculate on the feedback mechanisms that could arise and make things worse.
Roads to ruin: feedback mechanisms
The commercial real estate-small bank nexus allows for several scenarios in which both sectors could be destabilized. In the first two scenarios, a crisis occurs in one sector, causing problems in the other sector. Tighter credit and reduced activity in the CRE sector could push the economy into a mild recession. In the third scenario, a mild recession causes problems in both sectors, which could then reinforce each other and make the recession worse.
In scenario 1, a small banking crisis leads to problems in CRE. Given that the majority of CRE loans have been made by small banks, continued problems for small banks, caused by or leading to deposit flight, could force them to tighten lending to the CRE sector. This would reduce the supply of credit to CRE, causing additional problems for the CRE sector, on top of office vacancies and stagnating prices.
In scenario 2, a CRE crisis causes small banks to collapse. Even if small banks stabilize in the near future from the recent deposit flight problems, they could subsequently be dragged down by a crisis in the CRE sector. Defaults in CRE will asymmetrically hurt small banks rather than large banks, because of the concentration of CRE risks at small banks. This could lead to a new round of deposit flight from small banks to large banks and money market funds. The losses on loans and loss of funding could be lethal to small banks.
In scenario 3, a mild recession could cause a small banking crisis and a CRE crisis. In turn, this could lead to a more severe recession. A mild recession, for example caused by the Fed’s hiking cycle, will hurt the banking sector and the CRE sector at the same time. In particular, a recession would further reduce demand for office space. This will add to the problems in the CRE sector. Increased CRE defaults will hurt banks, especially the smaller ones with relatively more exposure to CRE. Losses on CRE loans will force banks to tighten credit, including for the CRE sector. The self-reinforcing problems in the two sectors could further drag down the overall economy, making the initially mild recession more severe. Specifically, tighter credit and reduced activity in the CRE sector will drag down GDP growth further.
We summarize the specific feedback mechanisms in the commercial real estate-small bank nexus in figure 6.
More broadly, we already saw in March how problems at small banks had an immediate adverse impact on financial markets. In combination with a faltering CRE sector this could severely undermine confidence among investors, consumers and businesses. This would have a broad-based negative impact on GDP growth.
Conclusion
COVID-19 appears to have a lasting negative impact on demand for commercial real estate. The federal regulators are aware of the risks in commercial real estate, but the Fed’s stress test provides a false sense of security. The finding that large banks are able to absorb losses on CRE loans in case of a CRE crisis is encouraging, but the bulk of CRE bank loans has been provided by small banks. In fact, while CRE lending by large banks has been stable, there has been a credit boom in CRE loans provided by small banks, more than doubling the amount since 2006. What’s more, small banks are more vulnerable to the CRE sector in terms of exposure and have already been hit by deposit outflows earlier this year. The commercial real estate-small bank nexus exposes the US economy to a vulnerability that could threaten financial stability and either cause a recession or make a recession more severe.
And another day, another inverted 10Y-2Y yield curve!
This chart goes along with negative bank credit growth.
Lastly, we have the Conference Board’s leading index plunging to -10!
Thanks in part to Cap’n Crunch, Fed Chair Jerome Powell!
“Bidenomics is indeed working!” claims Karine Jean-Pierre. “Cost is going down … wages going up, that is Bidenomics.”
Excuse me Karine. REAL weekly earnings growth remains negative as inflation outpaces weekly earnings growth. As of Q2 2023, REAL median weekly earnings growth is a dismal -3.57% YoY.
And if you are black, Bidenomics has failed you even worse! Q2 Real weekly earnings growth for black households was -6.23% YoY.
The US mortgage market is livin’ la vida Biden! And for the US mortgage market, la vida Biden in ugly.
Mortgage applications decreased 3.1 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending August 4, 2023.
The Market Composite Index, a measure of mortgage loan application volume, decreased 3.1 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 4 percent compared with the previous week. The Refinance Index decreased 4 percent from the previous week and was 37 percent lower than the same week one year ago. The seasonally adjusted Purchase Index decreased 3 percent from one week earlier. The unadjusted Purchase Index decreased 3 percent compared with the previous week and was27 percent lower than the same week one year ago.
Here is a chart of mortgage purchase applications with Biden’s record in the orange box.
Prepayment rates with rising mortgage rates (to try to cool Bidenflation) are now low by historic standards.
Here is a photo of Joe Biden (or is that Boss Tweed of NYC’s Tammany Hall)? Doesn’t matter because they are both the same corrupt person.
One of the themesongs of Biden’s Bidenomics should be Credit Card (CC) Rider, since consumers are turning to credit cards to cope with high inflation (Bidenomics).
US credit card debt oustanding just passed the $1 trillion mark as consumers continue to struggle with effects of inflation. Caused by The Federal Reserve and insame Federal spending. Note that sticky core inflation is still at 5.63%.
If we look at credit card debt compare to The Fed’s balance sheet, we see the relationship.
Credit cards + auto loan balances are now over $1.6 trillion.
Biden is currently out west trying to sell Bidenomics while announcing prohibitions on uranium m
The latest data from Trepp, which tracks commercial mortgage-backed securities (CMBS) securities market data, shows the delinquency rate of commercial property loans packaged up by Wall Street jumped again in July, with four of the five major property segments posting increases.
“While the rest of the US economy has seen relief in terms of higher equity prices, better-than-expected corporate earnings, and falling inflation numbers, the commercial real estate (CRE) market continues to be left behind,” Trepp wrote in the report.
Trepp data found the delinquency rate rose 51 basis points to 4.41% last month — the highest level since December 2021. Office delinquencies increased by 46 basis points to 4.96% — up more than 350 basis points since the end of 2022. The deterioration in the office segment is intensifying at an alarmingly rapid pace.
A broad overview of the US CMBS market shows the delinquency rate increased to 4.41%, a 51bps rise compared to the previous month, but still significantly lower than the 10.34% rate recorded in July 2012. The rate peaked at 10.32% in June 2020 during the government-forced Covid lockdowns.
Here are more highlights from the report:
Year over year, the overall US CMBS delinquency rate is up 135 basis points.
Year to date, the rate is up 137 basis points.
The percentage of loans that are seriously delinquent (60+ days delinquent, in foreclosure, REO, or non-performing balloons) is now 3.92%, up 20 basis points for the month.
If defeased loans were taken out of the equation, the overall headline delinquency rate would be 4.64%, up 51 basis points from June.
One year ago, the US CMBS delinquency rate was 3.06%.
Six months ago, the US CMBS delinquency rate was 2.94%.
To better understand what might come next for the CRE market, Kiran Raichura, Capital Economics’ deputy chief property economist, recently warned in a note to clients that the office segment might experience a 35% plunge in values by the second half 2025 and “is unlikely to be recovered even by 2040.”
According to swipe data from Kastle Systems, the US office occupancy rate is less than 50%. The figure has plateaued since September, indicating a new reality of remote work.
One major hurdle for CRE space is that “more than 50% of the $2.9 trillion in commercial mortgages will need to be renegotiated in the next 24 months when new lending rates are likely to be up by 350 to 450 basis points,” Lisa Shalett, chief investment officer for Morgan Stanley Wealth Management, wrote in a note to clients.
Shalett expects a “peak-to-trough CRE price decline of as much as 40%, worse than in the Great Financial Crisis.”
Bank of America analysts expect challenges in the CRE space but noted, “They are manageable and do not represent a systemic risk to the US economy.”
Meanwhile, analysts at UBS warned:
“About $1.3 billion of office mortgage loans are currently slated to mature over the next three years.
“It’s possible that some of these loans will need to be restructured, but the scope of the issue pales in comparison to the more than $2 trillion of bank equity capital. Office exposure for banks represents less than 5% of total loans and just 1.9% on average for large banks.”
We’ve already seen major building owners returning their office towers and malls to lenders in California (here & here) and elsewhere (here). This will result in an uptick in CMBS delinquencies moving forward.
“It is with profound disappointment that Yellow announces that it is closing after nearly 100 years in business,” said Yellow CEO Darren Hawkins in a statement Sunday.
Hawkins continued, “Today, it is not common for someone to work at one company for 20, 30, or even 40 years, yet many at Yellow did. For generations, Yellow provided hundreds of thousands of Americans with solid, good-paying jobs and fulfilling careers.”
Yellow’s bankruptcy marks the largest filing in US trucking history. The firm was responsible for roughly 15% of major corporations’ less than truckload. It has struggled with a sizeable debt load and changing consumer habits in a post-Covid environment. Yellow has $1 billion in debt due in 2024 alone and has struggled to find common ground with the Teamsters Union.
Hawkins blamed the union for the company’s failure:
“We faced nine months of union intransigence, bullying and deliberately destructive tactics.”
Yellow asked the Delaware court for permission to make payments, including employee wages and benefits, taxes, and certain vendors essential to its businesses.
Much of Yellow’s business halted weeks ago when it stopped making pickups. It axed most non-union employees and closed its yards at the end of July.
Stifel research director Bruce Chan said the demise of Yellow has been “two decades in the making,” blaming poor management and strategic decisions from the early 2000s.
For the overall trucking industry, Amit Mehrotra with Deutsche Bank said the collapse of Yellow is “clearly very positive for the companies that remain open for business.” He listed Old Dominion, Saia, CSX, and FedEx among other top picks in the industry.
Yellow shares trading in New York plunged more than 26% on the news. This followed a 781% surge from about 50 cents on July 27 to a high of $4.34 last Thursday.
Bidenomics = missing free markets replaced by the massive Federal foot of idiotic policies.
Yes, Bidenomics is an FDR-type massive expansion of government into the private sectors requiring massive Federal spending … and inflation. Except that it beenfits anything BIG and powerful to the detriment of the small and weak.
(Bloomberg) Friday’s jobs data sparked a relief rally in bonds and a flatter yield curve, but the pain trade is still for higher yields and a steeper curve – the lesser-spotted bear steepener – with this week’s CPI a potential catalyst.
Last week was a turbulent one for bonds, but the continued softening in payrolls data served to remind the market that supply and fiscal-profligacy fears have to be counter-balanced with an economy that’s in its late-cycle stages.
After the data, 10-year yields took the elevator back down to sub-4.05% after briefly going above 4.20%. They have since clambered back to 4.12%, but their next cue is likely to come from Thursday’s CPI report. Headline is expected to nudge back up to 3.3% (from 3% last month), mainly due to base effects, and core is expected to hold steady at 4.8%.
Still, stronger-than-expected data probably means higher yields in a market more acutely alert to inflation (and therefore supply) risks. As with last week, term premium would likely drive the move, meaning a curve steepening. After relentlessly flattening for the last two years, the pain trade is for a steeper curve. Implicit positioning of speculators from the COT report shows there is a heavy skew to a flatter curve.
The negative carry for most flatteners remains punitive (for 2s10s USTs it’s ~83bps over a year), but the large upside potential from supply/inflation worries and the covering of positions begins to make that look less insurmountable.
Finally, the Bundesbank’s decision to stop paying interest on domestic government deposits – which initially pushed short-term German bonds higher this morning – highlights the broader issue of central banks paying interest on reserves when they are superabundant.
In the days of QE and 0% interest rates, the ECB and Fed at al. remitted money to their treasuries from the income on their bond portfolios.
But now that is reversed as bond income is dwarfed by the cost of paying interest on trillions of bank reserves. Take the Fed, whose debt to the Treasury is now accruing at over $2 billion each week.
This is something that will become more politically contentious, especially as economies continue to slow and cost-of-living pressures bite further.
Bidenomics. The takeover of the US economy by BIG corporations, BIG labor unions, BIG tech, BIG pharma, BIG defense, BIG healthcare, BIG media, BIG banks, BIG tech, BIG … Well, anyting that is BIG and powerful that can buy influence in Congress and the Administration. Except BIG energy which lost out to BIG Progressive DC thinktanks.
Leading to BIG inflation!
But I feel good! Even though inflation expectations are soaring again as gasoline soars again.
If you believe the recovery talk (from the reckless Covid economic and school shutdowns of 2020), all is well in the (economic) garden. For example, M2 Money Velocity (GDP/M2), is almost back to where it was just prior to the 2020 Covid outbreak and resulting government-caused recession. M2 Velocity was 1.425 in Q4 2019 and was 1.289 for Q2 2023. But ever since The Federal Reserve became hyper intervention in the economy (let’s just start with Bernanke’s massive intervention in late 2008 (red line) and the Fed balance sheet expansion), and it was increased dramatically during the Covid shutdown. And is STILL above $8 trillion!
Before Bernanke and the financial crisis of 2008-2009, M2 Money Velocity was above 2.0. But it has been below 2.0 ever since The Fed’s intervention in 2008.
Granholm called China National Energy Administration Chairman Zhang Jianhua, a longstanding senior member of the Chinese Communist Party, for a half-hour one-on-one conversation on Nov. 21, 2021. Granholm’s calendar also shows an earlier phone call had been scheduled with Jianhua for Nov. 19 but a rep for the former Michigan governor said the first call never took place. Then, on Nov. 23, 2021, the White House announced a release of 50 million barrels of oil from the SPR, the largest release of its kind in U.S. history at the time.
According to Fox News, Granholm’s previously-undisclosed talks with China National Energy Administration Chairman Zhang Jianhua — revealed in internal Energy Department calendars obtained by Americans for Public Trust (APT) and shared with Fox News Digital — reveal that the Biden administration likely discussed its plans to release oil from the SPR with China before its public announcement in the US: yes, China’s Communist Party learned what Biden would be doing before the US did.
While Biden/Granholm are merrily draining the Strategic Petroleum Reserve, we see that West Texas Intermediate Crude Oil (Cushing) prices are up 54% under Biden and regular gasoline prices are up 58%.
All is sort of well in the garden because The Federal Reserve still has its massive interventionist foot on the gas pedal. Yet, America is on an economic suicide course with its green energy hype.
Frankly, Biden talks like Chance The Gardener from the film “Being There.” Except that Chance the Gardener is a nice person and Biden is reputed to have been the nastiest member of the US Senate. Not to mention the stupidest member of the US Senate. Although I don’t think Chance the Gardener would have taken millions in bribes from foreign countries like China and Ukraine.
Biden The Gardener should be Biden’s re-election slogan! Of course, Chance the Gardener could walk much better than Biden with his dementia shuffle. And Chance was a great gardener, all Biden knows how to do is sell the “Biden Brand” of political influece peddling to foreign countries.
Josef Stalin of the old Soviet Union used to be called County Joe. But Biden has so many possible nicknames: Corrupt Joe, Pay-for-play Joe, Sleazy Joe, Bully Joe, etc. How about Green Joe?
Green Joe (or the Nasty Green Giant?) along with his energy goon Jennifer Granholm, have drained the strategic petroleum reserve by 46% while gasoline prices have soared 60% under Bidenomics.
Gasoline prices have rise over 6.5% just since 7/23/2023.
Trump wants to drain the swamp, Biden/Granholm want to drain the strategic petroleum reserve so we can’t go back to fossil fuels. Biden and Granholm as Fossil Fools
Energy Secretary Jennifer “The Evil Pixie’ Granholm demostrating how she will refill the strategic petroleum reserve. Which she never will, of course.
Confounded Interest - Anthony B. Sanders 
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