An updated look at the banking data

also, let me introduce you to my little friend

Friday saw the release of the H.8 data which consists of the assets and liabilities of commercial banks in the US. This happens every Friday afternoon. I’ve found this data to be a fair indicator of economic activity. It is not going to warn us prior to a recession or market turn, but it can indicate how strong the current economy is. This is because when business is booming expansion happens and expansion is funded by bank loans. This is partly due to the costs associated with business expansion but also because it allows businesses to incorporate leverage into their enterprise. When business is thriving the company’s P&L and balance sheet reports look good and banks are eager to lend. The opposite happens when business activity is collapsing. Banks become unenthusiastic about lending money because they have difficulty seeing how they’ll be paid in full.

With all that said, I had to consult my magic 8-ball to figure out what it all meant.

Commercial and industrial loans are struggling to find the floor. Reading the chart it looks like these businesses got in on the PPP loan program that was offered during the shutdowns but have since, not found any reason to borrow further.

Loan and lease data tells a different story.

Here the floor was found and now a rebound is in progress. In eight of the last nine weeks, loans and leases have seen an increase. This is encouraging. It means that customers are finding goods worth borrowing money for and banks are finding credit worthy borrowers.

And for the finale, we have deposits…

Which are now $3.5T (trillion!) dollars above the 5 year trend line. This is unprecedented in the 48 year history of tracking deposits at commercial banks. When this abnormality was first being discussed, experts at Bank of America expected this money to find it’s way into the economy when “sunny days” returned. Now that we are seeing the end of summer, I’m curious if Bank of America would still hold to their theory. So far, deposits have only continued to accrue.

The general market saw some weakness today. I expect the market to encounter trouble so if you are a short-term guy or have options on the general market, now might be the time to sell. I believe this weakness will continue until the September options expiration (op-ex) date on the 17th. The topic of why this has begun to happen has been covered by a few different individuals (zerohedge, real investment advice). Essentially what is happening is the option market is exerting influence over the general market. When these option contracts get close to expiring, the dealers that take the other side of the trade try to balance their exposure. This pushes the market down. Once the options are settled, there is a furious rally to buy back in.

This has been a regular occurrence in the market for the past four months. It is always dangerous to count on previous market phenomena to consistently occur. This is because when patterns like this develop, market participants will get over-positioned in anticipation. This then causes the opposite of the pattern to occur causing maximum pain for those expecting a repeat.

Personally, I plan to use my magic 8-ball to decide what to do.

Uh, maybe that’s not a good idea.