How DEEP the Banking Crisis will Go | WARNING.

Goldman Sachs has opinions on how bad

this global banking crisis is going to

be and they give us some breakdowns of

where exactly we think some of the pain

is going to be and where the pain won't

be and they actually give us a breakdown

of five

explanations on how this banking crisis

could affect us and these five things

are actually pretty neat to understand

because they could give us a little bit

of guidance on how to invest going

forward now I think you all know this

already even though I'm a licensed

financial advisor the information in the

videos is not personalized Financial

advice but my thesis lately has been

that I think a Nike Swoosh recovery is

underway that is Peak fear occurred

somewhere between June and October where

we really thought we were going to get

Paul volckerd ever since the inflection

point in inflation those fears largely

went away and my belief is that the best

stocks to invest in between now and when

Real Estate bottoms when it makes time

to transition or potentially make sense

to transition to real estate between now

and then I think the best strategy is

investing in pricing power stocks

companies that have high free cash flow

and ideally are profitable the reason

you want High free cash flow and

profitable is so that they don't have to

raise money uh potentially because of a

negative earnings although they do have

high uh free cash flow they might still

have to raise money to invest and

continue to expand in growth so if you

get that combo of High free cash flow

and positive net net that could be a

nice way to get through especially if

you're focusing on those wealthier

companies or individuals and where they

might be spending because they might

have the most ability to spend through a

recession with that sort of recap done

it's important now to look at exactly

what Goldman Sachs thinks about this

banking crisis and I really think this

breakdown is interesting because a lot

of people are freaking out about this

idea that we are definitely going to see

a big slowdown and a massive credit

tightening that is just going to worse

first in the recession I was talking

about this yesterday and according to

NatWest we haven't actually yet seen a

short-term tightening in credit

conditions and that made me really

interested because I was talking with my

team and I mentioned hey we haven't seen

a short-term slowdown and or tightening

of credit conditions and since we

haven't seen a tightening of credit

conditions why uh like do we expect a

worse recession why do we think credit

conditions will tighten in the future

and our thought was well it'll probably

come right like credit conditions will

probably tighten and crush the economy

right well maybe not let's take a look

in here to Goldman sachs's view so they

say right here it's still too early to

have a very confident view of exactly

what's going to happen our Baseline

expectation is that reduced credit

availability will prove to be a headwind

so in other words a reduction in credit

is likely to happen but so far it

actually looks like it might just be a

headwind rather than a hurricane that

pushes the economy into recession and

forces the FED to ease aggressively now

because of this banking crisis Goldman

Sachs is actually moving up their

opinion that we're going to go into a

recession from 25 to 35 percent so

they've actually increased their opinion

that they're going in we're going into a

recession no they're very low on the

recessionary standard uh there's a 60

consensus estimate that we're going into

a recession these are all of the

estimates right here on forecasters who

think we're heading into a recession

Goldman Sachs is over here at just 35

whereas the median forecast is 60 chance

we're heading into a recession here but

they say here that yes there are risks

skewed to the negative that credit

tightening could be worse than we

actually think it will be so it's

possible things could go bad but it

seems like credit tightening might just

end up being a headwind and not a

hurricane and they give five reasons for

that and of course they do think that

ultimately GDP growth will be hit by

about four percentage points GDP

dropping from about 1.5 to 1.1 percent

but that's not recessionary that's still

clearly above zero zero is where you get

to recessionary so why are the numbers

not bigger and here are the five reasons

and I'll tell you they are fantastic

fantastic explanations on maybe why the

banking crisis won't be as bad as

actually thought and I really have been

looking for reasons like this because

the last couple weeks I've been a little

frustrated with how little literature

there is on on credit titing and I'm

thinking to myself like hasn't there

already been a lot of credit hiding is

there really going to be a lot more

because some risky banks failed so that

was my concern sort of in the back of my

mind like are we being too bearish here

so what does Goldman Sachs say and I

thought this was really interesting why

are these numbers not bigger first banks

have already been tightening their

credit standards since mid-21 2022 so

the incremental impact of the recent

turmoil on credit availability and

growth should be much smaller than the

situation in 2008 where the prior

expansion was largely built on easy

credit

real uh relatedly the private sector

runs a small Financial Surplus today so

first first big thing hey we actually

have already been tightening credit

standards so just because some risky

banks are going away who cares that

might not actually change anything on

top of that the private sector has more

cash today than it did in 2008 in fact

in 2008 businesses in the private sector

had a quote sizable deficit whereas

today we actually have a small Financial

Surplus

uh next uh I guess that's part of Reason

number one according to them so okay

fine second we do not expect larger

Banks which have high capital and

liquidity standards uh to be uh and are

subject to more stringent stress tests

to reduce loan Supply further they do

not expect big Banks to reduce loan

Supply further keep this in mind sort of

anecdotally

if I go to a big four bank and I've done

this in in my career and then when I

finally realized what the rule was I

stopped I remember going to the big four

Banks many times Bank of America City

Wells uh JP Morgan and I've gone to them

I'm like hey I got you know a real

estate portfolio 27 properties here it's

worth you know 24 25 million dollars I

I'd like to refinance the portfolio with

you oh we don't do portfolio loans okay

how many of them can I refinance with

you well we can only do four loans and

I'm like but Fannie and Freddie Mac uh

uh let you go up to 10 loans per person

which would be 20 loans for my wife and

I and like yeah no sorry Dodd-Frank says

we can only do four loans

and I basically have to walk out of the

big Banks because they're so tight

they're so tight they squeak uh and so

like how much tighter can it actually

get at the big Banks they basically suck

uh and this is why you do to some extent

want small Banks because it's easier to

get home equity lines of credit

portfolio lines of credit now you want

to be careful with with your cash

deposits because you don't want to be

subject to potentially taking a haircut

on your deposit uh that's why we've been

having these bankrupt fears but this is

actually a good argument that how much

tighter can they actually get I agree

uh number three third unrealized losses

on hell to mature maturity Bond

portfolios have diminished in the recent

rates Market rally another major

difference from 2008 when the problem

was that assets lost value during the

crisis okay so this is really important

to pay attention to

so understand this and I'm going to make

it very very simple okay let's say this

right here is your bag there we go this

is your your bag and we're gonna label

it this is your bag okay

in 2008

the value of your bag went down because

inside of this bag

were bonds and the value of those went

down in 2008. during that financial

crisis during today's financial crisis

23 the value of your bag is actually

going up

yes the value of your bag is going up in

2023 why because as soon as this banking

crisis started everybody fled to bonds

for safety and so the value of bonds

actually skyrocketed and yields fell as

people were fleeing to safety of bonds

more depositors were taking money out of

deposit and putting them into bonds

which actually increased the value of

the hell to maturity portfolios at Banks

so it's actually a really good point

that wait a minute wait a sec this is

different because number three the the

value of our bags is going up not down

this is completely the opposite of 2008.

fourth demand for credit in commercial

real estate where 80 of outstanding bank

loans are from uh sub 250 Bill Banks

were already Under Pressure because of

post covet changes in the real economy

so the incremental activity of reduced

credit may end up being quite muted in

that sector basically what they're

saying here is a after covid less people

were getting loans from uh smaller banks

in the commercial banking sector anyway

because well after all after covid less

people wanted to finance new Office

Buildings or commercial buildings anyway

so what difference does it make okay

good uh then an immediate source of

downside risk would be another deposit

run uh and uh keep in mind deposit runs

are somewhat related to retail

inventories retail inventories just came

out this very minute that I'm recording

this retail inventory is my month over

month up 0.8 percent but it kind of

suggests that people aren't actually

spending money on stuff as much and

inventories are piling up a little bit

wholesale inventories came in at point

two percent versus the negative point

one percent expected retail inventories

came in at point eight versus the point

two percent expected so a little bit of

a beat on inventories there is

potentially people are keeping more cash

but now the concern is even though

people are keeping more cash they're

looking for a yield on that cash so what

are they doing well obviously they're

buying big no they're not obviously

they're moving money into money market

funds high-yield savings accounts or CDs

or treasuries to get to actually get a

yield on their cash now keep in mind one

of the reasons you can get a yield on

your cash is because at least in my

opinion there's a huge opportunity cost

to being in treasuries or cash yielding

accounts right now because you're

potentially missing out on what could be

very substantial stock market gains but

then there's a flip side where there's a

potential of stock market gains there's

more risk and that's why that four or

five percent real yield right or not

real that four or five percent yield

right now is considered uh risk-free

whereas uh your stock opportunity cost

comes with a lot of risk right anyway an

immediate source of downside risk is

another deposit run an effective way to

reduce this risk would be to basically

guarantee all deposits fine

then Goldman Sachs goes on to say a more

subtle risk comes from upward pressure

on deposit rates and this is basically

saying that banks are going to have to

pay out more money and it's going to

lower their net interest income their

nii so if their nii goes down to prevent

that uh deposit flight then Bank

profitability could go down

there's also uh the fact that you know

they believe the FED should have paused

last time but because of the FED

continuing to go you could create some

more turmoil in markets however they're

actually optimistic on China and they're

raising their GDP forecast on China to

six percent uh versus uh versus the

United States and Europe where they're a

little bit more nervous

so what is sort of a conclusion

conclude off of this piece uh well oh

take a look at this chart this is

actually really interesting too uh and

then I want to get to the conclusion of

this piece look at these small Bank

withdrawals right here or change in

deposits massive flight out of small

Banks right here I mean that makes a lot

of sense but what is the point of this

piece

well this piece is basically telling you

everybody's really

concerned about oh no credit tightening

credit tightening credit tightening like

it's gonna Crush our economy we're gonna

go into a a big you know uh economic

Crush uh and and earnings are gonna

crash even more because of all this

credit tightening

that if there's this potential that all

this fear about credit tightening and a

massive economic depression because of

credit tightening could be the same kind

of Click bait when everybody was

screaming oil's going back to 140

dollars a barrel

just doesn't happen

the reason for that is very simply small

banks have already been lending less

because of commercial properties big

Banks already have tight lending

standards so it's hard to tighten them

even more so you might not actually see

any material difference in credit

standards Bank bags are getting smaller

not bigger big difference from 2008

private sector businesses have more

money today than they did in the past

and the FED even though they didn't

pause the last meeting are probably

likely to pause

next meeting or certainly the meeting

thereafter and more of those stresses of

economic strain could actually be

limited and so this is where they say

reasonably so hey look if we don't have

a Paul volcker well then we don't have

you know the worst case scenario but on

top of that we might not even get a

hurricane like Jamie Diamond forecasted

we might just get some headwinds that

basically just slow the economy down a

little bit which isn't that the point

isn't the whole point of what the fed's

doing

to slow down the demand side of the

equation to slow the economy to a level

of below Trend growth if trend is two to

two and a half percent growth and we're

growing at one percent there you go

fed's mission accomplished so with all

of that said it doesn't seem like the

economy actually is going to potentially

have this horrible credit tightening

cycle that just destroys the earnings of

every single company instead it seems

like hey it's gonna be some they're

gonna be some small effects but really

do they say get out of markets I don't

think so and neither does Goldman Sachs

so this is actually pretty positive news

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