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This is an abridged conversation from Seeking Alpha’s Investing Experts podcast. Recorded on May 20, 2023
- 0:10 – Bank tightening; harbinger of recession?
- 4:00 – Commercial real estate, lot of problematic loans coming due
- 6:30 – Big themes for energy sector over next few years
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Transcript
Kirk Spano: The banking sector in general, it’s going to tighten up. We don’t know exactly how much.
CashFlow Hunter: It has tightened up quite a bit. Yeah. I wrote an article about that, there is a survey put out that I never really paid that much attention to before, but economists have pointed it out to me, was the Senior Loan Officer Survey. And it’s starting to — Senior Loan Officers, particularly at regional banks, are responsible for an awful lot of liquidity and credit availability in this country, particularly for small and medium-sized businesses. And to the extent that they start saying, hey, we’re lending less, I think it has been predictive of the last six recessions going back to the 60s.
KS: Well, yeah, that’s something that I’ve been following as well. As I told you off-air, I consulted some private equity firms. And we’ve been looking at notes and properties and well, I was just in San Francisco. And it seems that the banks are going to get really tight here, because the regional banks actually provided a lot of the funding for a lot of the construction in the last 5, 6, 7, 8, 9, 10 years. And a big batch of those loans are due this year, next year, and the value of the properties is way below what’s owed on the properties.
So you’re seeing properties in big cities, Chicago, San Francisco, all over the place, because the vacancy rates are so high, I believe record highs. They can’t get the rents, which means that the value of the property is lower. And how are they going to refinance those notes without actually having to actually do a lot of work on the property to convert it somehow. So we’re looking at that right now.
Do you think that the impact is going to be that it pushes us into recession and affects a lot of other things? Or do you think that the banks muddle through with assistance from the Fed and we try to stay close to even on lending? Or do you really see lending tailing off quite a bit for a little while?
CH: I think lending will – it has tapered off. I think it will not rebound so fast. A lot of banks are going to be reluctant to lend until they really feel stability within their deposit base, which could happen sooner rather than later. But even if it does happen sooner, I don’t think banks are going to be so fast to lend, because the cost of deposits is still very high with an inverted yield curve relative to what they can lend to. So their net interest margins are getting squeezed pretty hard, yeah.
KS: And that is coming right into this debt ceiling, which I think that people misunderstand. We’re not going to default on the U.S. debt. However, once the debt ceiling gets raised, that’s a lot of liquidity that the Fed has to raise, because that’s where the government checkbook is. And that means that a lot of money is going to flow out of other places.
So we’re going to see tight liquidity from replenishing the government’s checkbook this summer and into the end of the year, something to the tune of $500 billion, $600 billion, $700 billion. And the banks, they’ve got a $1 trillion headache from the commercial loans. So we could potentially see way over a $1 trillion of tightening in the economy. Well, a trillion here, trillion there is a big deal.
CH: Yeah, I agree. And it’s — you touched on commercial real estate market. There’s an awful lot of loans that are coming due, that haven’t come due yet. And they’re going to be problematic. And it’s not just office buildings, although a lot of the real pain is going to be — the major, major write-offs are going to be in office buildings on a percentage basis.
But I think, look, there’s an awful lot of fairly crappy “Class A” that depends on your definition of Class A, garden apartment communities that were built an hour outside of Atlanta, or other Sunbelt states, or other Sunbelt cities that were financed at 70% to 80% loan to value. And those trades can be underwater fairly quickly. And a lot of people are not talking about potential losses that much in multifamily.
Look, there’s also an awful lot of warehouses and distribution centers that were bought or constructed during the COVID, post-COVID surge. And if the economy slows down, those things will not be able to realize rents that will support their debt, particularly when the buildings were built at incredibly low cap rates, and they were financed at incredibly low interest rates. And so if the rents don’t materialize, and the interest rates are higher on the loans, you can have pretty material losses. And I don’t know if you follow but Sam Zell died last week.
KS: Yeah.
CH: And actually, I met Sam, my senior year in college. He came to — I went to Wharton for college, and he spoke at a real estate conference. He was very good friends of professor of mine. So we had some time to meet, to speak with him. And he offered — someone asked him, do you have pieces of advice for us, as you know, going out into the world. And he just said he had two rules. He said don’t buy at auction, and don’t buy outdated office space. And I’ve never forgotten those two rules of Sam.
KS: Any other thoughts about energy that you think are big themes for the next few years?
CH: Look, I mean, natural gas is in the dumps right now, and inventories are high, but there’s an awful lot of LNG that’s going to start being exported. Yeah, I think Europe dodged the bullet this past year – this past winter with a mild winter. And they basically shut in all of their high energy industrial industry. I don’t think that Europe is going to be permanently shutting down their high energy using industry forever. And yeah, I guess you could have another couple of warm winters in a row.
But if you don’t, there’s going to be an awful lot of demand for natural gas coming out of Europe. And I still like — so I still like natural gas plays and they’ve come down a lot. You just have to make sure like anything in energy that you’re buying these things — you make your money in energy buying when everything’s gone to hell, not when prices are high. So, natural gas back at $2 or $2.50 is down to back to a relatively low level. And particularly when you start having these LNG, export facilities are going to start coming online. So I like natural gas, but you have to obviously pick your assets, pick your management teams carefully.
KS: Yeah. I agree on Europe, what you said there. And I would throw in India. I think India is a catalyst for a lot of energy growth in the next several years, because they just can’t transition fast enough.
CH: No, and actually, that’s a great point. And India is actually — I think India is now the largest importer of U.S. propane right now. I think that’s right.
KS: It is.
CH: And look — they’re an awful — India has terrible pollution problems. And a lot of it is caused not by heavy industry, frankly. A lot of it’s caused by people having ovens in their backyards that are fueled by coal or by dung, and a much cleaner propane is a cheap replacement for both of those fuels. And it doesn’t take much to distribute propane tanks with little burners attached to them. And so that is a big initiative by the Indian government. I think it’s going to continue to be a big initiative.
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