Think the question is still up in the air, but am not so convinced that credit isn't contracting:
M1: measures consumer daily living funds, no growth:
2005-03-21 1384.1
2005-10-24 1376.3
The M2 chart you posted gives the appearance of strong growth, but percentage wise it's slowing in the second half:
2005-07-04 6527.5
2005-10-24 6636.5 (4.2% annualized)
In my view M2 is more fueled by real estate purchases, which slowed measurably in the last month.
idorfman.com
I use non-M1 M2 as well, here's last five weeks, the slow down in the purchase index will drag this flatter or potentially lower in my view:
2005-09-19 5241.5
2005-09-26 5224.8
2005-10-03 5225.5
2005-10-10 5254.1
2005-10-17 5287.8
2005-10-24 5260.1
Watch out for the OCC's tougher lending standard crack down, will have a big impact on money supply and credit growth, from Contrary Investor. The bolded "capital is a coward" item very much supports Mish's "death knell" scenario:
<At that point, IMO, money will IMMEDIATELY go from being loosey goosey to incredibly overtight in one fell swoop.>
Oh Say Can You OCC?...As you might know, the OCC (Office of the Comptroller of the Currency and one of the chief banking system regulators) is set to hand down guidelines regarding bank commercial and residential real estate landing practices prior to year end. Given the fact that interagency discussions about the initial draft of the guidelines has really only just begun, don't be surprised if it's somewhere in 1Q 2006 that final guideline commentary is made public. Nonetheless, it's clear to us from recent comments by the Comptroller himself that in terms of residential real estate credit availability, the times they are about to be a changin'. At least as far as the banks are concerned. For the full version of his recent comments made on October 27th, just follow the link. Of course we couldn't help but excerpt a few lines here and there from the text that will give you the feel for the raised level of OCC concern regarding recent bank real estate lending practices. It's absolutely clear to us that these folks want to see "new era" residential mortgage lending products reigned in rather meaningfully. And unless the US banks are desirous of unwanted audit scrutiny, they're going to get in line with the guidelines. Here are just a few unedited excerpts directly from the text we linked above that, if you will, sets the tone in terms of the regulatory level of concern.
"But it's at the top of the credit cycle where stresses and weaknesses typically appear, so what we are seeing today should not surprise anyone. With liquidity pouring into the market, we would expect to see increased competition for loan customers - and we are. With competition intensifying, we would expect to see underwriting standards easing - and we are. And we would expect to find emerging concentrations in some loan categories, such as commercial and residential real estate. We are most definitely seeing that. One of the striking findings in our 2005 underwriting survey was the breadth and extent to which banks had relaxed their lending standards.
"But while the trend toward increased credit risk is visible across the portfolio and across the country, it really stands out in two product areas. The first is commercial real estate; the second, residential first mortgages.
"Such concentrations by themselves would warrant supervisory concern under any circumstances. But in order to attract new business and sustain loan volume, banks have made many compromises and concessions to borrowers along the way, resulting in commercial real estate credits with structural weaknesses that go beyond discounted pricing.
"It seems like only yesterday when a 5/1 ARM was considered a risky mortgage product. And it was - but primarily for borrowers, who, in turn for lower initial payments, assumed the interest rate risk that had previously been borne by lenders. Today's non-traditional mortgage products - interest-only, payment option ARMs, no doc and low-doc, and piggyback mortgages, to name the most prominent examples - are a different species of product, with novel and potentially risky features. I don't have to explain those features to you, because these products have come to dominate the mortgage originations that many of you look at every day.
"The dominance is increasingly reflected in the numbers. By some estimates, interest-only products constituted approximately 50 percent of all mortgage originations last year. In the first half of 2005, IOs started to decline in favor of payment-option ARMs, which, according to one source, comprised half of new mortgage originations. And roughly every other mortgage these days is also a "piggyback" or reduced documentation mortgage, which points to another development that concerns us: the trend toward "layering" of multiple risks."
The charge of the OCC is to maintain a safe and sound banking system. There's simply no question that in 2006, they will be carrying the banner of real estate lending practice concern as they charge into US banks from sea to shining sea. What will this do to the character of mortgage lending in the US broadly? Of course that remains to be seen. The OCC is concerned with the banks. It's not the regulator of subprime lenders such as New Century. After all, despite the fact that NEW's stock price is down over 40% this year alone, New Century can go right on making any kind of loans it chooses. Remember, as we've told you many a time now, the largest source of mortgage credit creation in the US over the last few years has been the asset backed markets. They will react when defaults begin to occur, if they ever do. But for now, what's important in watching for change in the residential real estate markets is to watch all sources of credit creation and how the character of that lending changes ahead. For now, at least according to the OCC, the US banking system is going to be taking one step back from imbibing in "new age" mortgage lending practices of the last three to five years. That's one small dent in the armor of overall credit availability. One last comment. We're absolutely convinced that private capital, which supports the asset backed securities markets, will turn the credit spigot off entirely if default trouble begins to brew in residential mortgage lending land. Remember, as we've told you ad nauseum over the last half decade at least, capital is inherently a coward. There's always too much when it's least needed and it's never around when it's needed most. |
