Without much fanfare, the very official-sounding Senior Loan Officer Opinion Survey on Lending Practices came out last week.

 

One reason is because the results showed that bank lending standards are tightening at a pace that has signaled recessions for the past 35 years.

 

Every other time loan officers have tightened loan standards this much, the Fed was already cutting interest rates.

 

That makes sense, right? If money is tight and the economy is weak, the Fed loosens the purse strings.

 

Could this report be the canary in a coal mine? 

 

Today, I’ll out the details and stocks that could provide confirmation of wider spreads ahead. 

 

Survey Says

 

Here is the report, sourced right from the Federal Reserve: 

 

Fed Loan Officer Survey: Tightening Commercial and Industrial Standards plus increasing spreads (Large & Med Sized Firms)

 

Above zero is an indication of tighter lending standards …

 

 

Lenders are Following the Fed

 

The Fed graph below shows that during the past four recessions (gray areas) bank rates were falling to soften the blow from tighter lending standards …

As I have been saying, this time is very different from times in the past …

 

Today the Federal debt is above 120% greater than GDP, and the annual budget deficit is greater than 7% of GDP.

 

In every other recession post the Great Depression, the debt was never an issue.

 

Now, the banks and the Fed know how dangerous the situation is but they sugar coat it because a debt crisis buries the banks and the financial system. 

 

A Game of Chicken

 

This lending standard signpost may be the most significant data we have received and it was buried by the media.

 

Check out this last chart, which shows how tighter lending standards lead to a rise in unemployment. 

 

 

Well, now we can anticipate a rise in unemployment, which will be the data the Fed needs to trigger a pause in tightening.

 

We may first get a market downturn on the bad economic news while the Fed continues to talk tough …

 

That will be the dip to buy.

 

Bring It Home

 

With the Fed and the banks playing a game of inside baseball, we have to look inside the numbers to see who is winning.

 

We have the advantage because nobody can beat inflation.

 

We just need the data to tell us when the inside game is over …

 

The answer is if/when the Fed screams uncle and pauses the tightening cycle before they have completed their plan. 

 

The clues that we are close to that point will be when we begin hearing about corporate bond defaults. 

 

The stock that will warn us of a pickup in defaults will be iShares high Yield Corporate Bond ETF (Ticker: HYG) because it holds risky corporate bonds … 

 

As money becomes harder to borrow, defaults will hit high yield debt first and HYG may have given us an early warning last week …

 

 

If HYG takes out the low of the candle (circled above) it may be time to get short.

 

I will be watching HYG and Fed data, so stay tuned and as always …

 

Live and Trade With Passion My Friend,

 

Griff