From CBB, December 9:
I’ve been eagerly anticipating the Fed’s Q3 Z.1 report. As expected, Credit growth slowed somewhat. At a seasonally-adjusted and annualized (SAAR) $3.284 TN pace, Non-Financial Debt (NFD) growth slowed from Q2’s SAAR $4.318 TN and Q1’s SAAR $5.438 TN. NFD ended September at a record $68.463 TN, or 266% of GDP. Unless Q4 Credit growth surprises to the downside, 2022 debt growth will be second only to 2020’s onslaught.
For perspective, annual NFD growth averaged $1.816 TN during the two-decade period 2000 through 2019. This year’s growth in NFD will likely double this average, ongoing Credit excess that is creating ample inflationary fuel. While there was slowing in mortgage Credit growth, powerful lending booms continued. And as the Fed’s balance sheet contracts, the GSEs (government-sponsored enterprises) continue their substantial expansion.
Importantly, exceptionally strong lending growth ran unabated – bank and non-bank. Despite the Fed’s tightening cycle and a year of weak securities market performance, the Great Credit Bubble inflation was ongoing. It has been an extraordinary dynamic. The Fed commenced an aggressive tightening cycle. As one would expect, financial conditions tightened meaningfully – in the markets. Unexpectedly, general Credit and financial conditions away from the securities markets loosened. Indeed, market instability actually worked to bolster key Credit structures financing the economy, including bank lending and “private Credit.”
A brief jaunt down memory lane. Recall that two Bear Stearns Credit funds blew up in June 2007, marking the beginning to the end of the mortgage finance Bubble. As buyers of the riskier tranches of high-risk mortgage derivatives, their demise knocked out the marginal source of demand for riskier mortgage Credit. Yet the subprime eruption was not immediately contractionary. Instead, sinking Treasury and bond yields spurred a big rally in conventional mortgage securities prices. This extended the mortgage lending cycle. The $500 billion of second-half 2007 mortgage Credit growth bolstered the Bubble economy, while holding crisis dynamics at bay. It all came home to roost in late 2008.
Fast-forward to 2022. The Fed’s tightening cycle and resulting market instability worked to stoke the boom in non-market-based lending. Resulting strong system Credit growth underpinned economic resilience and tight labor markets. Loose finance and low unemployment supported strong household and business Credit fundamentals (i.e. low delinquencies/charge-offs), which further emboldened enterprising bank and non-bank lenders.
The role of so-called “private Credit” is huge and unappreciated....
....MUCH MORE
Two quick points:
1) There is an insane amount of credit/money sloshing around the world.
2) His eagerly awaiting the quarterly Z.1 report is akin to my anticipation of the weekly h.4.1 report or the market's frisson ahead of the USDA WASDE reports during the growing season.
