We are in an unprecedented fiscal experiment
Economic downturns are usually accompanied (and perhaps prolonged) by a tightening of private credit, as you can see on this chart of S&P 500 performance vs commercial and industrial loans from all commercial banks. Lending significantly lags stock market performance, but a downturn in lending generally confirms a recession, and an upturn in lending generally confirms a new bull market.
This time, however, is different-- at least in terms of the initial response. The rapid downturn in stocks was met with a huge spike in new private lending, encouraged by massive Fed liquidity, and the recovery of stocks was as sharp as the initial selloff. Now, however, lending has turned back downward, and it's possible that over the next year we could see the same tightening of credit that usually accompanies a recession. The Fed can increase bank reserves, but it can't increase borrowers' collateral or their appetite for risk in a difficult economic environment.
Does this downturn in private lending, like the previous ones, confirm that we're in a recession and that stocks will slide from here? Will the next upturn in private lending signal that we're back in a bull market? Only time will tell, but the results of this experiment will have huge ramifications for both policymakers and investors for decades to come.
Hat tip to @TayFx for help constructing this chart. Also check out his cool charts of SPX vs. M2 money supply and Fed balance sheet:
This time, however, is different-- at least in terms of the initial response. The rapid downturn in stocks was met with a huge spike in new private lending, encouraged by massive Fed liquidity, and the recovery of stocks was as sharp as the initial selloff. Now, however, lending has turned back downward, and it's possible that over the next year we could see the same tightening of credit that usually accompanies a recession. The Fed can increase bank reserves, but it can't increase borrowers' collateral or their appetite for risk in a difficult economic environment.
Does this downturn in private lending, like the previous ones, confirm that we're in a recession and that stocks will slide from here? Will the next upturn in private lending signal that we're back in a bull market? Only time will tell, but the results of this experiment will have huge ramifications for both policymakers and investors for decades to come.
Hat tip to @TayFx for help constructing this chart. Also check out his cool charts of SPX vs. M2 money supply and Fed balance sheet:
