Roughly two months ago, when we compared the loan data released by America's largest, TBTF banks, and what the Fed's own commercial bank data revealed in its weekly H.8 statement, we asked a simple question: "Is The Fed Fabricating Loan Creation Data?" Visually, the discrepancy was shown as follows:
Our summary then:
Is the Fed fabricating loan level data? Or, less dramatically, is the Fed merely once again goalseeking its weekly "data" to account for a world in which deposit expansion is no longer running at the pace seen in pre-taper days. It would be logical that the one "plug" the Fed would adjust to balance off its model is to boost lending activity, which would explain why the Fed is suggesting lending is surging.
Unfortunately, lending is not only not surging, it is contracting, if only among the Big 4 banks in the first quarter.
So whether the Fed has an ulterior motive, or is simply fudging for a lowered Fed reserve creation growth trendline, we believe the people deserve an answer: just what is really going on here?
Why is this data so important? Because absent a pick up in commercial bank lending, which should eventually match and surpass the amount of bank "assets" created by the Fed's QE (which in 2013 amounted to $255 billion per quarter), then bank liabilities can't grow nearly as fast, and as we showed earlier this week, neither can US GDP which is directly correlated to the amount of commercial bank liabilities in circulation.
In other words, more than anything else, it is loan creation - i.e., money creation in its conventional pathway, via commercial banks not via the mutant, aborted process in which the Fed creates money only to ramp asset values - that is so critical for real, not artificial, not manipulated, US economic growth.
So did we make up our allegation, and did we simply dream up the data that we showed above?
Well, no. At least not according to one of America's largest banks: Bank of America. As BofA's Michelle Mayer admits, looking at C&I loan data - both that sourced directly by BofA, and by the Fed's own call reports, while "the outstanding level of commercial and industrial BAC loans has been growing at a fairly steady pace for the past three years"... "there was acceleration into 2013, but the last few months show some slowing, consistent with the weakness in capex spending. The Federal Reserve data are more volatile, showing both a bigger slowdown last year and a bigger pickup recently."
She concludes: "A meaningful improvement from trend would be a signal that a more robust capex recovery has begun. We have yet to see this in the data."
We sure do: because the bulk of cash that would otherwise be spent on CapEx: that most productive use of funds for the entire economy, and for broad GDP in general, has instead been trapped and redirected into shareholder friendly, but business model crushing, stock buybacks mostly purchased on credit, which means the moment there is another downturn and rates rise, all those corporations which succumbed to activist investors will be that much closer to record-levered insolvency.
But back to loans, because while the C&I data is mixed at best, where things get really bad is looking purely at commercial loans.
It is here that Bank of America reveals the startling truth:
The number of new commercial loans made by BAC has declined notably over the first half of the year. Measured as an indexed level to cycle peak (which was December 2005), the data show that the recent drop was the largest since the recovery began.
Oops. If this is accurate then not only is the Fed fabricating loan data outright, it is massively misrepresenting the general direction of loan creation altogether. In fact, if loans are contracting, when one adds the decline in reserve "asset" creation, then banks are set for a world of pain come October when QE is set to end!
BofA admits as much:
The drop in new loans is a worrisome sign given the importance of new business formation and small business expansion in generating a stronger overall recovery. The number of loans for renewal/extension has remained fairly constant, holding steady through the recession.
So while we will know for sure if the Fed is lying after the Q2 bank loan data is released when we have two quarters of discrepancies, the initial readings are very troubling. What is worse, it may well be that the Fed is not maliciously and deliberately manipulating loan data, but is merely Fed incorrect information. Which would explain its willingness to taper: if the Fed realized that bank loan creation is not only not growing but declining, what it should be doing it untapering post haste and in fact adding to QE.
We wonder just how long it will take Yellen to grasp this fundamental flaw in its thinking...