- How does this affect your future loans and credit?
- Fed Chair Jerome Powell’s preferred yield curve indicator has fallen off a cliff
- The cost to protect against the U.S. default is on the rise
Dear Reader,
Last week we talked about the looming credit crunch and how it could lead right into a recession. Which leads us right into the next question – how are banks preparing for this?
Through the beginning of April, both loan demand and credit conditions deteriorated, according to the Dallas Fed Banking Conditions Survey.
Both have reversed lower and are near the worst since the pandemic erupted. Both series are limited and the data only goes back to 2017, but it gives you an idea that not only are credit conditions worse (which means banks are unwilling to lend, making the credit needs much higher) but also people don't want loans at the current rates.
It’s not a surprise. In any scenario where interest rates are rising and the economy is slowing down, loan demand is going to slow down right with it. You’re going to do everything you can financially before resorting to a bank loan.
If you think about it, businesses are essentially telling banks – your rates are extremely high, you need all this information from me, I’m just not doing it and they walk away.
And for each business that walks away, it reduces the velocity of money. The velocity of money is the rate at which money is exchanged in the economy. And that’s a big piece of what needs to be watched when we're looking at monetary policy,
What If the Velocity of Money Nosedives?
If the velocity of money nosedives, we're going to have to look at the ramifications. That could create a higher chance of that systemic credit risk we discussed earlier, because of the lack of movement and the lack of availability of dollars in the system.
That's when you start looking at some of these key pieces with the 18-month forward, three month spot, and the three month spread. The spot rate refers to the current price or bond yield, while a forward rate refers to the price or yield for the same product or instrument at some point in the future.
The spread is the difference in the yield on two different bonds or two classes of bonds. You can see in the chart below, inversion is the worst it's been going back to 1996.
Powell’s Preferred Yield Curve Indicator Has Fallen Off a Cliff
Now, you might be thinking, why are we talking about this? Well, according to Powell, his preferred yield curve indicator is this metric below.
As you can see, Powell’s preferred yield curve indicator is much lower than it’s been in the last 16 years. Look, there’s no way to sugarcoat it, this is not a healthy chart. And it’s something that's going to cause Powell to have a bit of a pause.
The Bond Market Has Become Substantially More Volatile
Realistically, when you start looking at bond volatility, some of that fear is actually when they should be cutting rates. It’s when they should start seeing a pivot. However, when you look at the median numbers of inflation, it’s not going down.
That's where you get a problem, especially when you start looking at unemployment rates remaining depressed, it's going to be difficult for them to adjust.
This is going to put more pressure in the system, which is why we do see central banks staying hawkish. We also see the FED staying hawkish. That’s because inflation is elevated, which then elevates the chances of that systemic risk.
Thanks for reading,
Freedom Financial News
