Asset prices continued to leap higher this past week. The Nasdaq is positive for the year. IG corporate credit spreads have closed the gap to pre-COVID-19 levels.
Orphaned sectors outside the Fed liquidity “bear hug” – parts of the CLO market, community bank TruPS debt, CMBS, repo for unrated debt, and marketplace loans remain “dislocated.”
Last week, 5.2MM workers filed for unemployment benefits, bringing the total unemployed to more than 22 million, wiping out all job creation since the Great Recession.
This week, we have a lot of data & analysis to dig into: early remit data from credit card revolving portfolios, bank provisions, and retail spend trends by industry.
But first, we touch on the asset price vs. unemployment conundrum.
The Asset Price vs Unemployment Conundrum
One of the most frequent topics this past week is “why are asset prices rising in the face of job and demand destruction?”
Small businesses are shuttering. Nearly half of Americans do not have one month of liquidity. Sectors such as travel, hospitality, and leisure may be in the doldrums for years, even with a vaccine. The unemployment rate is expected to vault into the double digits and will likely persist.
Almost none of this matters on the narrow question of “when does the business cycle expansion resume?”
Why Is This Time Different?
Unlike prior recessions, the collapse in activity is driven by a legal and physical constraint. Put simply, it is illegal for many businesses to do business. Those constraints, placed for sound public health reasons, have plunged GDP to say, [~60%] of historical levels.
This recession ends, almost by definition, on the same day when constraints on commercial activity are lifted. Almost to the day. Transactions that otherwise would have happened will start happening.
That does not mean an instant recovery to pre-crisis highs or full employment. It does not mean there are gobs of “pent up demand” to ride subways, fly planes, or shake hands at your favorite conference. It means GDP goes to say, [70%] of pre-crisis levels.
None of those standards mark the end of a recession.
The recession ends when output – production, income, retail sales, and employment – is higher than the prior period. That’s it.
This is a strange time in that the economic lever is in control and in view. Expectations are that a gradual re-opening and refined public health policy will take place in May. (The biggest risk to our view is a double-dip from a fall resurgence in COVID-19.)
When those constraints are lifted, the virtuous cycle of production and income growth (albeit from extremely low levels) will resume.
A final note – there will be no better time to grow a business than in the quarters to follow. Rents will be low, talent will be abundant, debts purged, and marketing costs will be cheap. A major shift in behavior, especially to digital, will create opportunities for players that can lean in.
Is the Banking System Set for Pain or a Gravy Train?
This past week, banks increased the provision for losses by nearly $20Bn across JPM, BAC, WFC, C, and GS.
As we shared in a contrarian view on the U.S. consumer, the reported death of the U.S. consumer is greatly exaggerated. We would not be surprised if 50% of the $20Bn provision build is released in 12 to 15 months. (We set a calendar reminder so we can hold ourselves accountable.)
The mainstream view is that banks are in for significant losses. Markets show banks such as Citi trading at .5 price-to-book ratio, a $100Bn gap in market value and book value (implying tens of billions in asset value impairments [!?]).
Most banks simply do not have a large exposure/share to small business loans – that is why the non-bank/specialty finance sector exists. Banks do have varying exposures to commercial mortgages, construction loans, energy, and retailers – all of which will have loss content.
What’s the typical big bank experience? JPM reported a whopping 23% increase in deposits to $1.8Tn. That represents $200 to $300Bn in new loans over the last two months [!!].
Put starkly, large corporates are taking out a (revolving) loan. They pay the banks full freight and market rates when spreads are at multi-year highs. The borrower parks the deposits back in the bank. Add 8 to 10 turns of leverage from deposit finance. Not bad!
This time around, banks are sources of strength and are injecting billions of liquidity.
More FinTechs Authorized for PPP Loans – But Late To the Party?
FinTechs Ok’d to Make Emergency Small-Business Loans (American Banker, 04/14/2020) PayPal, Intuit QuickBooks Capital, and Square Capital said that in recent days the federal government has approved them to make loans under the $349Bn Paycheck Protection Program.
However, PPP funds were tapped out this past Thursday. Congress is expected to upsize the fund by another $250Bn to $300Bn this week.
See LendIt’s running list of All of the Fintechs Involved in PPP Loans.
Consumers Missing Mortgage Payments – Harbinger of Loan DQs?
Approximately 3.74% of home loans are in forbearance, up from about 2.73% the prior week.
PeerIQ sees forbearance/loan deferment clocking in at 3 to 5% across the MPL sector so far.
We’ll keep an eye on the data to see how these metrics evolve. PeerIQ is making the data available on the data & analytics platform, just as fast as each originator updates the data.
PeerIQ’s Lender Handbook – Take Advantage of our ‘Investor Portal’ During the Crisis Period
COVID-19 has interrupted liquidity in the consumer lending market. Consequently, the flow of credit to consumers and small businesses is substantially impaired.
PeerIQ is taking steps within the industry to unlock liquidity by:
First, we are releasing a ‘Lender Handbook‘ to loan and company investors to educate and broaden awareness for the asset class.
Second, during the crisis, PeerIQ will offer a complimentary/no-charge use of our “investor portal.” Your capital markets team will be able to showcase collateral to dozens of investors in a private and secure analytical environment. The “investor portal” service includes complimentary data onboarding, cleansing, and standardization for the duration of the crisis.
Reach out to take advantage of the opportunity during the crisis period.
Chart of The Week: Daily Spend by Industry Category
Source: BAC Internal Data, PeerIQ
- Another 5.2 Million U.S. Workers Filed for Unemployment Benefits Last Week (WSJ, 04/16/2020) An additional 5.2MM workers filed for unemployment benefits, which raised the total of unemployed in a month due to COVID-19 shutdowns to more than 20MM.
- Coronavirus Delivers Record Blow to US Retail Sales in March (CNBC, 04/15/2020) According to a Reuters survey of economists, retail sales were forecast to have fallen 8.0% in March.
- The Mystery Behind the Fed’s Refusal to Suspend Bank Dividends (Yahoo Finance, 04/14/2020) Chairman Jerome Powell said it was unnecessary to suspend cash dividends because banks are “highly capitalized.”
- Fed’s Kashkari Says Banks Should Raise Money, Halt Dividends (Bloomberg, 04/16/2020) Federal Reserve Bank of Minneapolis President, Neel Kashkari, wants large U.S. banks to raise $2Bn from private investors and stop paying dividends to support the economy.
- Coronavirus Pandemic Fuels Rapid Increase in Missed Mortgage Payments (WSJ, 04/13/2020) More Americans are expected to seek forbearance from mortgage companies as unemployment increases.
- General Atlantic, Tripp Smith to Launch Roughly $5 Billion Distressed-Investing Fund (WSJ, 04/14/2020) General Atlantic teams up with Tripp Smith to launch a roughly $5Bn fund that will provide funding for companies impacted by the COVID-19 pandemic.
- FinTechs Ok’d to Make Emergency Small-Business Loans (American Banker, 04/14/2020) So far Paypal, Intuit Quickbooks Capital, and Square Capital have been declared direct lenders in the PPP, while more await approval.
- All of the Fintechs Involved in PPP Loans (LendIt, 04/16/2020) List of FinTech lenders who are currently involved in the Paycheck Protection Program.
- Adapting Contact Centers During the Coronavirus Crisis (LendIt, 04/13/2020) How FinTech contact centers are adjusting during the COVID-19 pandemic.
- BankThink The Difference During this Crisis? Customers Trust their Banks (American Banker, 04/14/2020) The rapid spread of COVID-19 has reminded the world that banks are not so easy to displace.
- Banks Brace for Big Loan Defaults by U.S., Global Customers (AP News, 04/15/2020) Major banks in the U.S. anticipate a lot of loan defaults as households and business customers take a big financial hit from the COVID-19 pandemic.
- It’s Not All Bad for Banks (Bloomberg, 04/14/2020) When markets are crazy, liquidity is very valuable, so banks can charge a lot for it.
- Bank of America Profit Falls 45% as It Prepares for Loan Defaults (WSJ, 04/15/2020) Bank of America set aside an additional $3.6Bn for potential bad loans, which is a reflection of the darkening economic outlook.
- JPMorgan Profit Sinks to Lowest Since 2013 on Virus Fallout (04/14/2020) JPMorgan Chase announced that its first-quarter profit fell 69% to the lowest in more than six years as credit cost surged.
- JPMorgan Prepares for Wave of Defaults Linked to Coronavirus Shutdown (WSJ, 04/14/2020) Economists at JPMorgan Chase have amended their forecast to a 40% decline in GDP and 20% unemployment rate.
- Chase now Requires 700 FICO Score, 20% Down Payment to Buy a Home (HousingWire, 04/13/2020) Chase increased their lending standards amid economic struggles.
- Goldman Braces for Loan Losses, But Its Wall Street Arm Shines (04/15/2020) Goldman Sachs reported that revenue for Q1 2020 was $8.74Bn.
- Citigroup Profit Slides 46% Amid Coronavirus Fallout (WSJ, 04/15/2020) Revenue at Citigroup increased by 12% to $20.73Bn in Q1 2020.
- Do We Live in A Lopsided Universe? (Scientific American). If your life sometimes seems directionless, you might legitimately blame the universe.