Keeping it Simple | Ep. 31: Scoring with a Bank Shot…
Dec 19, 2023
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The podcast discusses the performance of the banking industry and its different sectors, the impact of recent changes in New York City's hospitality market, the issue of oversupply and misallocation of resources, innovations in property replacement and the challenges in New York City, systemic factors leading to the Global Financial Crisis, challenges in the high yield space, and a disclaimer and legal information regarding Simplify Asset Management, Inc.
The residential real estate market remains strong with low default rates, while the commercial sector faces challenges and high default rates.
The approaching maturity wall in the high-yield market poses a potential risk of defaults and restructurings.
Balanced regulation is needed to ensure banks can innovate and drive economic growth, while also promoting stability.
Deep dives
Tale of Two Markets: Commercial vs. Residential
The podcast highlights the contrasting conditions in the commercial and residential real estate markets. While the residential sector remains strong with almost no default risk and low loss rates, the commercial side is experiencing significant challenges, particularly in the commercial and multifamily segments. The COVID-19 pandemic and its aftermath have exacerbated structural issues in the commercial sector, leading to high default rates, especially in commercial real estate. On the other hand, residential properties experience high demand, low default rates, and negative loss given default. It is clear that there are two distinct stories in real estate with different challenges and prospects for recovery.
The Implications of the Maturity Wall
The podcast emphasizes the approaching maturity wall in the high-yield market and its potential repercussions. The maturity wall refers to a large volume of high-yield bonds that will come due in the next few years, creating a significant refinancing challenge. Many issuers took advantage of low interest rates during the pandemic to issue debt with longer maturities, resulting in a concentration of debt repayments due in 2024 and 2025. The concern is that tightening credit conditions and rising interest rates may hinder refinancing efforts and lead to a higher risk of defaults and restructurings. This poses a potential threat to the stability of the high-yield market and could have broader implications for the overall economy.
Bank Regulation and the Future of Banks
The podcast discusses bank regulation and its impact on the banking industry. The speaker expresses support for regulations like the Volcker Rule, which restricts banks' speculative activities, but also highlights potential pitfalls of certain rules, such as limitations on market making. The concern is that excessive regulation could hamper banks' ability to innovate and generate profits, which may lead to banks becoming more like regulated utilities and less effective in driving economic growth. Additionally, the podcast suggests that banks, particularly larger ones, have significant amounts of capital that are not being fully utilized for lending or investment purposes, potentially hindering economic growth. The speaker recommends a balanced approach to regulation that promotes stability while ensuring banks can effectively serve their role in the economy.
The Problem with Structured Products and Leveraged Structures
The podcast discusses how the Global Financial Crisis (GFC) was not solely caused by high home prices, but rather by the assumptions underlying leveraged structures like CDOs and tronched mortgages. The speaker explains how these structures expanded the pool of assets and increased leverage, creating more economic pieces of paper. They also highlight the misconception that nobody wants fixed income and that people are willing to buy equity-based products like call overwriting strategies or buffered funds, which effectively function as fixed income assets. The speaker emphasizes that these types of products become risky when credit costs rise, as they collapse and become unsustainable.
Challenges for Banks, Credit Availability, and the Hard Money Standard
The podcast explores the challenges banks face in a changing economic landscape. It discusses how banks are normalizing their expenses and income in the face of rising funding costs. The speaker highlights the decline in non-interest earnings due to a lack of deal flow. The discussion also includes the potential impact of credit availability and the emergence of a hard money standard. The speaker suggests that banks may diversify their funding and term it out to mitigate volatility. The conversation concludes by noting that the future credit cycle needs careful observation as credit becomes a potential challenge in the coming years.
Chris Whalen brings his banking expertise to Keeping it Simple.
For more information, visit simplify.us.
Simplify Asset Management Inc. is a Registered Investment Adviser.
Advisory services are only offered to clients or prospective clients
where Simplify Asset Management Inc. and its representatives are
properly licensed or exempt from licensure. SEC registration does not constitute an endorsement of the firm by the Commission, nor does it indicate that the advisor has attained a particular level of skill or ability. Be sure to first consult with a qualified financial adviser
and/or tax professional before implementing any strategy. This content is not intended to provide investment, tax, or legal advice.
This content is solely for informational purposes and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. These materials are made available on an “as is” basis, without representation or warranty.
The information contained in these materials has been obtained from sources that Simplify Asset Management Inc. believes to be reliable, but accuracy and completeness are not guaranteed. This information is only current as of the date indicated and may be superseded by subsequent market events or for other reasons. Neither the author nor Simplify Asset Management Inc. undertakes to advise you of any changes in the views expressed herein.
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