One of the good things about the 24/7 news cycle, perhaps one of its few positive externalities, is that it’s a boon for the pontification business. It enables all sorts of otherwise serious people to make fools of themselves day in and day out predicting generally gloomy stuff, as sunshine doesn’t sell. As a card-carrying member of the chattering class, this empowers me to publish periodic outlooks about the future with little risk of any fundamental embarrassment. It’s sort of a no risk undertaking, isn’t it? If you happen to get something right (think blind cat finding dead mouse), you can claim to be a star. If you get it wrong, well, everyone else got it wrong, too – and often on national television.
The other thing we’ve got going for us in the bloviating business is that we remain in fraught and friable times. We are running short of good synonyms for shock and outrage and struggling to describe what might actually be viewed as extraordinary. What really does extraordinary mean these days? These make good times for the prediction biz. It’s not much fun making predictions when not much changes. Imagine that poor sod, talking to the Pharaoh during the Old Kingdom after reading many entrails, I foresee…nothing really changing for 2000 years; more news at 11.
Unburdened by much of the way in data and little in the way of anxiety about getting it wrong, I’m ready to tell you all about 2020:
This election is going to have consequences. First, like the bow wave of a great ship, the coming election cycle is undoubtedly going to begin to disrupt almost everything starting around June. What we may think is knowable and predictable about the here and now, might be wildly unpredictable in the actual run up to the voting.
Where does the election come out? Absent a Joe Biden candidacy, with a more robust Joe Biden than we’ve seen so far, it looks like 4 more years of the Orange Swan. But hold on, how about Mayor Bloomberg. Given that every wannabe presidential candidate I see out there is, by normal standards, entirely unelectable, what’s wrong with a white, 70 year old male, lifelong New Yorker who’s a billionaire? Really!
In any event, first we get to enjoy the entertainment of a brokered convention for the first time since 1952. We are blessed to live in such times. I hear tell that four or five of the major candidates could get to the end of the primary season with a fair bunch of delegates. There’s only 2,000 delegates; what’s that divided by 63 billion? Of course, said Swan could change that outcome by doing something really and profoundly annoying to his base. But given what we’ve seen so far, it’s curiously difficult to imagine what that could be. Maybe hugging Nancy Pelosi…and meaning it?
It would be a surprise if the Republicans didn’t hold the Senate and the Democrats didn’t hold the House. Half the US population will continue to broadly loathe and misunderstand the other half. Everyone will hunker down with their tribal confreres, embracing the comfort of the echo chamber of confirmation bias all while hurling obloquy at the other side.
While that’s not a pretty picture, we have sort of gotten used to it, haven’t we? Pundits keep saying that this can’t go on and that our current politics is a form of unstable isotope that will have to resolve itself into more stable substance. Kind of hard to see how we get back to the good old 20th century log rolling, back scratching, belly rubbing, deal cutting type of democracy. But if not that, what? (That “what” is kind of scary, isn’t it?) Fraught and friable our times will remain.
Everyone will be in favor of doing something about climate change as long as it doesn’t cost anything, doesn’t affect our lifestyle and doesn’t mean that we can’t eat steaks. China, India and third world countries will remain huge advocates with the certainty that they will not be obliged to do anything, nor even be obliged to be embarrassed by not doing anything. None of this will affect doing business with the good old US of A. Requiescat in pace.
The US Economy and CRE Markets
Let’s start with the fact that there’s not going to be a recession and there’s not going to be much inflation either. The credit curve will be pretty stable. There will be more lenders in the commercial real estate space with more money, looking for love. Another good borrower year. Borrower appetite will continue to tip toward the floating rate market. Traditionally, one bought 10-year fixed rate money as a hedge against inflation. That delightful exercise of predicting a significant upturn in inflation and therefore the curve in two years has finally worn out its welcome and there’s a fairly strong consensus that the price of money and the price of credit are likely to remain flat to stable for some considerable bit of time and in that case, why pay the premium for a fixed rate loan and float? I see lots of floating rate paper ahead of us. This will make legacy LIBOR a bigger problem.
Speaking of that, LIBOR is not going to get better fast. We now have 2 years before LIBOR goes away and somehow all of a sudden that doesn’t seem like enough time to fix the problem. Not much has happened and my guess is that not much will for a while yet. The epicenter of the problem is going to be the commercial real estate market and few yet appreciate how hard it’s going to be for even the best intended lender to get its borrower community onboard. Few borrowers will be motivated to fix this and virtually none of them will show the energy around the issue that the lenders ultimately will show. Many borrowers might look at this as an opportunity to extract value. Bet on it.
Our new best friend SOFR is rather unready for its leading role. Unfortunately we can’t do summer stock for 10 years before taking it to Broadway to figure it all out. It would be really nice if we knew how SOFR will perform when it actually underlies $300 trillion of financial assets. It would be lovely if we knew how to price financial assets without an index that has real sensitivity to macroeconomic change, the type of macroeconomic sensitivity that unloved LIBOR delivered.
We’re going to see some SOFR deals this year, almost certainly in the SASB space. Someone is going to want bragging rights for putting a stake in the ground first. By the end of 2020, we will see a discernible movement toward SOFR based priced SASBs, although I think it will be 2021 before SOFR bleeds into the non-standalone market. None of that is going to make transition of the legacy book any easier.
The CRE CLO market will continue to grow. With more floating rate debt, more alternate lenders who yearn for and in fact desperately need leverage, and with more investors in desperate need of yield thinking that the CRE CLO market is not the bogey man that many thought in the lee of the Great Recession, that business will grow. $30 billion baby!
Conduit CMBS will reprise its role as the boiled frog until someone steps up and actually fixes the disconnect between the wildly unamiable servicing experience of the borrower community and the needs of investors. This frog will boil, this ice cube will melt. Pick your analogy, but however you look at it, the conduit business is sad and will not be getting better. As the lender of last resort, it’s the first to go when there are alternatives, and there will be. Bold ideas and conviction could fix this and reinvigorate the conduit business. Holding your breath?
There will be consolidation in the alternate lending space. There are simply too many platforms out there, too many platforms with inadequate scale and access to capital to make the alternate lending business work. One needs to be able to both originate loans and conduct capital markets activities at the same time; pat your head and rub your tummy, as it were. Many in the alternate lender-verse, perhaps most, cannot. Enough capital has to be assembled so that the platform can engage on a coherent and consistent basis with the marketplace and not cycle through periods of diminished capacity while waiting for the next CRE CLO or leverage vehicle to be put in place. To succeed in this business, you need to be one of the mortgage bankers’ first calls. If you’re not there all the time and ready to close, you won’t be. Could you make any of this work with $500 million of capital these days? It’s hard. Unless you can originate, securitize, buy and sell and lever on a consistent and coherent basis, you can’t generate the revenue to afford the talent. And absent the talent, you can’t do the business.
Brexit will become boring. Does anyone following the politics of Europe really think that the Europeans are going to do something exciting, do something dramatic or let something significant happen that otherwise could be kicked down the road? After a great deal of huffing and puffing and after the European Community’s 200th summit in three years, after a great deal of posturing for domestic audiences and belly rubbing between the French and the Germans, an accommodation will be reached sometime next year (or the year after, or the year after that…you get the idea) to allow Germans to sell cars in England and the English to sell financial services in Europe. While all of the actors may change costumes for the next act, the play will go on. Brexit won’t screw up Europe in a significant way. Italy still might.
There are so many black swans out there, they’re going to go on sale soon: China, Iran, Venezuela, Russia, the Mideast writ large, populism across the established democracies, India, our own damn election, the $20 trillion debt overhang and negative interest rates. There’s so much to worry about, it’s almost hard to worry at all. Eventually, the squawking of the black swans becomes noise but one might still blow up in our face. Sure, black swans have always been with us and we should be grateful that bad things don’t happen as often as they might (or as often as they are often predicted to do). The black swan population does, however, seem asymmetrically large this year.
The Chinese government looking increasingly like a cross between 1984 and the Court of Henry VIII with a little mid-century Europe tossed in for good measure and it’s auditioning to play hegemon in a theatre near you. Bears watching.
Other Important Things
Dechert will have 600 guests at our cocktail party next week. And that doesn’t include members of that other oldest profession with really nifty looking business cards who are sure to crash the party.
Jack Cohen’s panel at CREFC next week will be measured. The first rule of the public forum is informed by the old adage (apparently only apocryphally attributable to Mr. Ben Johnson) that it’s better to remain silent and be thought a fool than to speak and remove all doubt. However, our old friend Jack Cohen will assuredly make everyone in his opening session bloviate. So if you can’t be silent, the next best thing is to go 100% conventional. Be unremarkable, be white bread, be balanced, be nuanced, be pablum. “Things will be largely okay; while there will be risks, we’ll manage through the risks. The year won’t be great, but it won’t be bad. Blah, blah, blah.” Yawn. I hope someone throws a hand grenade or two. Jack, you listening?
The New York football Giants won’t suck as bad next year as they did this year. Yankees will win the World Series. A movie that only 11 people actually went to see, including the director’s mom, will win huge accolades at the Oscars. It will be about something depressing. The number of people who will be famous for being famous will grow. Hollywood will continue to hector us about the virtue of their polities – you go, Ricky Gervais!
Hannity and Rachel Maddow get together to reprise a James Carville and Mary Matalin lecture series. Regrettably, at their first appearance, the crowd tore them apart.
So that’s it for now. I have to tell you that Dechert’s base case for its business planning purposes is that the year will be relatively quiescent. No extinction asteroids will hit either actually or metaphorically. This remarkable recovery will continue to grind on. I’ll trade that being right for street cred on most of the above any day.