Great data and certainly appreciate the entertaining presentation of the view. It's why I subscribe and always read your views. Would play devils advocate on one or two points though - and would be curious if you have any thoughts. 1) The ICE BofA HY effective yield got as low as ~3.9% in Sep '21 and spent most of '20/'21 with a 4 or 5% handle. Recent HY spreads are the lowest they've been in '23, indicating the better-than-feared growth environment (which has driven the gov't curve higher). I'd think either a) growth hangs in and you don't get the recessionary environment that leads to a spike in defaults or b) you see growth roll over in '24 and the Fed starts to cut (Fed futures pricing 125bps of cuts for next year). Unless you see a complete falling out of bed, that would lead to lower gov't rates and potentially a HY effective yield that is similar or possibly lower than today. I'm not saying HY is a pound the table opportunity, but in a growth environment that's hung in, 8-9% yields that provide a decent amount of cushion and the S&P forward P/E at 19 or 20x... you could do worse than credit. 2) With CRE, it seems like extend and pretend is the way most of this will play out. It doesn't interest anyone to have significant defaults. My view is that it just is one component that leads to overall tighter lending standards out of banks (esp small and mid-sized banks as you note). There will be anecdotal situations of major RE/PE firms walking away from properties in the most stressed metro areas, but I'd still take the other side of the potential armageddon scenario playing out. 3) With AirBnB - a good example in why following the herd can lead to a poor outcome. However, I'd assume the vast, vast majority of these mortgages were fixed in nature and aren't at all sensitive to rates moving higher. And with overall, for sale inventory at historic lows, I'd think you don't have a) a cliff in home prices or b) the average AirBnB owner feeling like they're in such a financial pinch necessitating they sell. Maybe less desirable cash flow than anticipated, but I fail to see the armageddon scenario here either. All that said... looks like a trip to Paris would make a lot of sense right about now! Thanks as always for the content that makes you think.
Great data and certainly appreciate the entertaining presentation of the view. It's why I subscribe and always read your views. Would play devils advocate on one or two points though - and would be curious if you have any thoughts. 1) The ICE BofA HY effective yield got as low as ~3.9% in Sep '21 and spent most of '20/'21 with a 4 or 5% handle. Recent HY spreads are the lowest they've been in '23, indicating the better-than-feared growth environment (which has driven the gov't curve higher). I'd think either a) growth hangs in and you don't get the recessionary environment that leads to a spike in defaults or b) you see growth roll over in '24 and the Fed starts to cut (Fed futures pricing 125bps of cuts for next year). Unless you see a complete falling out of bed, that would lead to lower gov't rates and potentially a HY effective yield that is similar or possibly lower than today. I'm not saying HY is a pound the table opportunity, but in a growth environment that's hung in, 8-9% yields that provide a decent amount of cushion and the S&P forward P/E at 19 or 20x... you could do worse than credit. 2) With CRE, it seems like extend and pretend is the way most of this will play out. It doesn't interest anyone to have significant defaults. My view is that it just is one component that leads to overall tighter lending standards out of banks (esp small and mid-sized banks as you note). There will be anecdotal situations of major RE/PE firms walking away from properties in the most stressed metro areas, but I'd still take the other side of the potential armageddon scenario playing out. 3) With AirBnB - a good example in why following the herd can lead to a poor outcome. However, I'd assume the vast, vast majority of these mortgages were fixed in nature and aren't at all sensitive to rates moving higher. And with overall, for sale inventory at historic lows, I'd think you don't have a) a cliff in home prices or b) the average AirBnB owner feeling like they're in such a financial pinch necessitating they sell. Maybe less desirable cash flow than anticipated, but I fail to see the armageddon scenario here either. All that said... looks like a trip to Paris would make a lot of sense right about now! Thanks as always for the content that makes you think.