Federal Reserve Bank quarterly Z1 report on credit

SOURCE: 

Credit Bubble Bulletin : Weekly Commentary: Blackstone, Inflection Points and the Z.1

"Loose finance and low unemployment supported strong household and business Credit fundamentals (i.e. low delinquencies/charge-offs), which further emboldened enterprising bank and non-bank lenders.

The role of so-called “private Credit” is huge and unappreciated.

December 8 – Bloomberg (Lisa Lee, Silas Brown and John Gittelsohn): “Blackstone Inc.’s $50 billion private credit fund fueled its rise into the biggest powerhouse in direct leveraged lending. But with some wealthy investors now pulling capital, nerves are on edge about what’s next for funds targeting affluent retail investors in the $1.4 trillion dollar market. BCRED, a non-traded fund that’s been instrumental in transforming the leveraged finance markets, has had an incredible run since it was set up nearly two years ago, attracting billions of dollars each month.”

December 7 – Financial Times (Antoine Gara): “The head of Blackstone has spoken out for the first time since the investment group restricted withdrawals from a $69bn property fund, tying a spate of redemptions to investors facing stress in Asia. The outlook for the Blackstone Real Estate Income Trust, or Breit, has riveted Wall Street after the group limited withdrawals last week. Blackstone’s stock has slid more than 10% since the announcement. Blackstone chief executive Stephen Schwarzman… disputed the idea that the restrictions reflected problems at the fund, which has $125bn of assets mostly invested in warehouses and apartments in the US when accounting for leverage.”

Growth has been nothing short of stunning – REIT assets surged $38.6 billion, or 36%, over nine months (ended 9/30) to $144.9 billion. The fund is leveraged, with Total Liabilities jumping 39% in nine months to $92.292 billion. BCRED assets surged $19.9 billion, or 62%, over nine months to $52.3 billion. Over this period, debt jumped 48% to $27.0 billion.

I believe the move to redeem investments from the Blackstone funds and similar structures marks an inflection point in “private credit.” And while Blackstone can limit quarterly withdrawals to 5% of assets, the prospect of these funds turning sellers instead of aggressive buyers/lenders has major ramifications for real estate markets and corporate lending. 

 Q3 2022 Z.1 report

Over four quarters, Bank Loans surged an unprecedented $1.504 TN, or 12.3%.  For perspective, Bank Loans expanded $519 billion during 2021, below 2005’s record $685 billion. Over the two decades ended 2019, annual Bank Loan growth averaged $363 billion.

Mortgages expanded $187 billion, or 12.1% annualized, to a record $6.349 billion.  Annual numbers -- Mortgages $503 billion, or 8.6%; and Consumer Credit $307 billion, or 13.6%.

Home Mortgage borrowings expanded at a 6.61% rate, down from Q2’s 8.62%. One-year Home Mortgage growth of $922 billion is the strongest growth since 2006’s $1.082 TN. 

Federal borrowings expanded SAAR $1.101 TN during the quarter. This put one-year growth at $2.219 TN, or 9.1%. Over 11 pandemic quarters, Treasuries surged an incredible $7.450 TN, or 39.2%.   Since the end of 2007, outstanding Treasury Securities have inflated $20.418 TN, or 337%.

A $537 billion contraction in Federal Reserve Assets 

- to $7.663 TN. 

Government Sponsored Enterprise (GSE) Assets expanded $217 billion, or 9.9% annualized, during Q3 to a record $8.983 TN – lagging only Q1 2020 ($325bn) and Q2 2022 ($248bn). This boosted one-year growth to an outrageous $828 billion, or 10.2%. 

GSE assets inflated $1.853 TN, or 26%, over the past 11 pandemic quarters. Why? The Fed is now raising rates and attempting to tighten financial conditions, as it fights the worst inflation in decades. Meanwhile, their Beltway neighbors partake in Credit inflation like never before.

Household Net Worth (Assets less Liabilities) declined $392 billion during the quarter to $143.278 TN, with a one-year drop of $2.028 TN (1.4%). After peaking at 617% (Q4 2021), Household Net Worth-to-GDP has declined to 558%. This compares to previous cycle peaks of 491% (Q2 2007) and 445% (Q1 2000). Net Worth-to-GDP dropped to 416% during Q1 2009.

The Bank of International Settlements this week raised another serious issue.

December 5 – Bloomberg (Paul J. Davies): “Sixty-five trillion dollars is a not big number: It’s a huge, barely comprehensible number. It’s more than 2 1/2 times the size of the entire US Treasury market, the world’s biggest. It’s 14% of the value of all financial assets globally… It’s also the value of hidden dollar debt unrecorded on the balance sheets of non-US banks and shadow banks as of June this year, also according to the BIS… It has been growing rapidly, having nearly doubled since 2008. The fact that most of this hidden debt is owed to banks is another reminder of the ever-growing and opaque interconnections between the traditional financial system and the shadow banking sector. A whole set of recent mini-crises has shown that these links are part of why central banks keep being forced to step in and stabilize government bond markets and other assets when stress levels rise.”