The Banks will Become Irrelevant
Well maybe that is a bit of an extreme statement, but the reality for most borrowers, save the larger corporate and investment market, is that bank financing is no longer a viable source of funds. This trend has been accelerating since the 2008 financial meltdown and is primarily due to our friends in Washington D.C. attempting to “fix” the system with ever stricter legislative strangulation. So as the politicos and their regulatory offspring continue to fight the previous battle, the market is responding as it always does – it adapts.
Though I have been watching this development for some time, the GE moment hit when a friend and former banker and I were discussing this issue over a couple of dry cappuccinos’. Having lived though bank layoffs, restructurings, mergers and more, it had gotten to the point where nearly every deal he sourced was denied somewhere in the bowls of the institution. Fed up, he walked away from the industry.
Today, he resides at one of the many loan origination/financial conduit companies that are unshackled from the FDIC Insurance noose. Providing financing to consumers, businesses, students, real estate and on; these firms are sprouting up like weeds. The Economist estimates there are now at least 450 loan origination firms in the U.S. As for my friend, he loves calling on his brethren still struggling in the banks and gladly accepts all the deals they must deny.
The Economy
The words above are but one small example of our tremendously flexible economy and why we continue to lead the world. Yes, the first reading of the 4th quarter GDP is disappointing while unemployment ticked up. Yet these can be explained by a few seasonal/extraordinary factors and increased labor force participation. Summation: we are on the right track.
The Markets
Maybe it was all the negative headlines last month or the holiday hangover, but domestic stocks certainly took a hit. And while all eyes are focused on the energy sector as the primary culprit, this area accounts for just 8.4% of the market. The goods news comes from the bond arena as overseas investors continue to place funds within our shores as they cope with negative yields on ever more sovereign debt in Europe and parts of Asia. From an alternative perspective, look at the divergence of domestic real estate and commodities. Don’t tell me diversification doesn’t work.
Strategies
Portfolio adjusting was the name of the game during the final days of 2014 and early 2015 here at the shop. By re-emphasizing core positions in domestic stocks and bonds, we once again lowered portfolio costs. The underlying positions now come in at a weighted 25-30 bps. Now that’s cheap! More effective positions in real estate and cash equivalents along with the realization that asset classes such as long-short, TIPs, and bank loans are not adding enough value per their incremental costs have led to, what we believe, more appropriate allocations in this environment.
Looking ahead
Two and a half decades in this business have taught us to expect the unexpected. While the Greek’s have painted themselves into a corner, the concern is their financial neglect contaminates other markets with such a moral hazard. Russia, ISES, et al. also continue to create waves. Yet overriding such concerns is our adaptable economy and markets. Remaining with core exposure to the primary asset classes along with satellite positions as complements is a recipe that has withstood the test of time.
-David Halseth
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