March 26 – One of you shared this with me. Good info and it seems to put a definitive range on expected loan losses for CRE loans. When two different methods come up in the same general range that can provide some confidence in the forecasts.
· Commercial real-estate loans made by banks will suffer as much as a 2.5% loss rate over the next five years, according to the analysis of 12,500 loans now on the books of banks ranging in size from small community banks to the largest banks in the country. If that were applied to the $2.3 trillion of outstanding commercial real-estate bank loans, then losses would amount to $57.5 billion, Trepp says.
· The Fed’s own stress tests of banks capital adequacy assumes a CRE loss rate of $65.7B.
· Loss rates last year were less than 0.1%.
· Between 2008 and 2011, the peak default rate was 4.4%, according to Trepp. That default rate will hit a peak no higher than 2.7% in the expected Covid-19 downturn, Trepp said.
· Defaults this time probably won’t soar so high partly because bank portfolios were in relatively strong shape leading up to 2020.
· Hotels and shopping centers will likely be the hardest-hit property type with cumulative default rates over five years of 34.8% and 16%, respectively, according to Trepp. Apartment buildings and industrial property will be hurt the least with respective default rates of 3.3% and 3.0%, the analysis said.
On a different issue, I heard a nice, concise explanation of how large of a bailout is needed in the USA. Last year, our GDP totaled $21.44 Trillion. If 2Q GDP falls 25% to 35% (or pick the number you like), then the bailout will need to be $5.4 to $7.5 Trillion. The various bailout Acts passed by Congress and the purchases by the Fed are heading towards that range.
What I don’t get is the backside of this decline. As of today, annual GDP projections for 2020 are around -3.0%. That would indicate an annual economic loss of less than a trillion dollars. So, how is the Fed and the US Government going to get back $4-6 Trillion they lend out? I doubt they will get much back. We basically increase our overall debt many fold. Of course, even these amounts are trivial compared to the $100 Trillion+in unfunded pensions, government handouts, and so on.
Another video I was watching (Hidden Secrets of Money – Part 1…the series is on YouTube. I highly recommend viewing it.) said a researcher found 600 (!!!) fiat currencies in history that began with the letter A and was half way thru the B’s when he stopped. All 600 currencies went to Zero. The point being the US Dollar and all other existing currencies won’t be exceptions.
Lastly, I am seeing numerous predictions that many countries will totally disappear in the upcoming years. That may seem surprising. But, go back to an atlas of 1900 and see how many countries no longer exist in 2020. So, I guess I won’t be surprised to see dozens of countries get ate up by their neighbors. That was the norm throughout history until the past 70 years. We have lived in an anomaly that has come to an end. I think the only good thing for us in the Western Hemisphere is that most of the changes will occur in the Eastern Hemisphere.
The 1920’s were the Roaring 20’s. That term might apply again to these 20’s, but for a different reason. Some aggressive countries will be roaring as they take over their neighbors.
Enough cheerful news for today. Everyone be safe.