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Unused Corporate Credit, The Real Deal

Businesses are sitting on record amounts of unused credit from U.S. banks, which could help unleash spending.

Tweeted Bloomberg’s very capable Lisa Abramowicz this morning. I consider her one of the good Wall Street journos. Which is saying something because at least half of them are hacks.

She was referencing a piece in today’s Wall Street mob daily. I won’t give Boss Murdoch a dime of my hard earned money to read his propaganda, but it’s useful to know what mouthpiece of the mob is touting. You can glean it from the headlines and blurbs. They get disseminated on Twitter by the unquestioning gaggle of other followers.

So the banks have extended all this credit, and businesses aren’t using it. Well of course they’re taking the expanded lines. It costs them ZERO. And when the time is right, they’ll use it to buy back the stock options they issued themselves, so they can retire as billionaires, or at least multicentimillionaires, while eventually leaving stockholders holding the bag.

That assumes, of course, that eventually this whole shell game that the Fed and Wall Street are playing eventually does come undone. They’ve managed to keep it going for 12 years, even after it almost collapsed last year.

So I give credit where due to the manipulators. And always, to Rule Number One. Don’t fight the Fed. If I’ve learned anything in 53 years of following the markets every day, it’s that.

Also Rule Number Two- Don’t fight the tape. AKA, the trend is your friend. Too many of my erstwhile fellow bears bloody their heads banging against the walls on which those Rules are tagged, year after year.

Meanwhile, here’s a chart that should give you some perspective on what those CEOs might be planning for those unused credit lines down the road. If you believe that past is prologue, then the 2014-19 period is instructive.

The blue line is an index of real business investment including manufactured capital goods purchases excluding defense, and private commercial and industrial construction spending. It has a little lag because the commercial construction component is a slow release, about 6 weeks after the fact. But it typically follows capital goods spending, which was up again last month. So the line is surging.

Real Business Investment, C&I Loans, and Stock Prices

But it’s only back to where it was in late 2014. It’s still in a long term downtrend.

Meanwhile, those unused credit lines keep growing because businesses keep paying down their outstanding C&I Loans, on top of applying for and getting bigger lines. This downtrend has been in place since the pandemic panic surge of April-May 2020. But the long term uptrend in C&I borrowing remains intact.

During the 2014-19 period, stock prices correlated with C&I borrowing. No kidding. C suite execs were using free credit to buy back the stock options they issued themselves. Stockholders loved it because that was on top of QE boosting stock prices. It was a win win for all Street insiders. A Ponzi scheme that worked.

Now the game has changed because stock prices are so high, CEOs see an opportunity to get free permanent money from investors. That’s even better than free borrowing, because they never have to pay it back. So they can continue paying themselves out of the stock option game by selling stock to investors. Some of that stock they “generously” offer investors is the stock that corporate execs issued themselves.

Of course, as many corporations do this, it increases the supply of stock. The advance in stock prices slows down (which it has, in case you haven’t noticed). If they keep this up, and the delicate balance between stock issuance and buybacks, US Treasury issuance and Fed QE, shifts ever so slightly, there could be another accident in the markets.

I suspect that that’s inevitable. It’s only a matter of timing.

I keep track of those flows for you in the Liquidity Trader Money Trends Reports. The latest is here. Here’s How Fed and Treasury Colluded to Delay Armageddon Due Date. I’ll have another report for you coming up later today.

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