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, but even though it's positive, you can amplify that positivity by getting 12 free stocks with Weeble at Metcaven.com free and the sponsored link down below for life insurance you can get in as little as five minutes as well as the fact that you can now use Buy Now Pay later on the programs on building your wealth linked down below foreign.