Enzio's Clock

Background

1. So what is the Economic Time™ ?

Readers know that we the Economic Clock is signaling an 

• excess demand for money, and an
  
• excess supply of goods

By an "excess demand for money" we clearly are not referring to any policy-induced excess demand. Indeed, if you do not know of recent Central Bank easing, then you are wasting your time on my site.

This time, the pernicious fact is that the excess demand for money is created by commercial banks: they don't want to lend. The bad news is that this unwillingness to lend means that corporates are being choked. So cash flows, the life blood of any economy, dry up.

Contrary to central bank policy, you cannot force banks to lend, as we all know. And that is what makes this cycle a particularly nasty one.

So when will lending resume?

2. Where are we in the lending cycle?

Having trawled through America's lending data since 1976, it seems to me as if the lending of commercial banks to the real estate sector demonstrates a reasonably tight "fit" with the stock market.

Intuitively, this makes sense: if real estate lending declines, then the value of real estate has to fall: demand for it has dried-up. And with that decline, the "feel good" factor that is so crucial to private consumption also takes a dive - or, in the jargon of our Economic Clock, an excess supply of goods is created. 

Since 1976, lending to the American real estate sector has had two major down-legs:

• it peaked in December, 1978 and troughed in March 1983, and
• it peaked in August, 1987 and troughed in April, 1993.
  

Simple, back of the envelope arithmetic suggests that 

• the average slowdown (i.e. peak to trough of annual percentage changes) was 61 months - call it five years, and that
  
• one can give or take seven months on either side of this five year average.

Lending to the real estate sector peaked in February, 2007. Using our new-found arithmetic, this would suggest that lending to the real estate sector 

• will bottom in 1Q2012
• or at least will bottom between 4Q2011 and 3Q2012

Obviously, the stock market will not march in lock-step with this. Based on its behaviour during the past two major downlegs in the real estate lending cycle,  you can assume quite safely that it will have gone to "L", i.e. got stuck in a rut by the middle of next year, and will keep flopping around like a fish on a hot cement sidewalk. (I still believe that we have a couple of market down legs ahead of us, at least one being induced by the less-talked-about credit card mess.)

4. How to make as well as protect money off this idea

1. Always consult your financial adviser first.
2. With banks lending less, their profits have to decline, so re-visit our earlier recommendation, the ETF that shorts American financials, SKF:US
3. But with the profits outlook for banking stocks getting bleaker, keeping your money as time deposits at the "safe" bank may require some re-thinking: your time deposits may be at risk. Here are some things to ask that friendly banker of yours.