Bryan:

Hello and welcome back to Change and the Market, your weekly look at the changing real estate market. I'm your host, Bryan, joined as always by our resident market expert, Chris Masiello. Good morning Chris, how are you doing today?

Chris:

Hi Bryan. Good to be with you and good to be with our community.

Bryan:

Awesome.

Chris:

On this snowy New England Day.

Bryan:

Yeah, so we were talking before we started about how you guys got dumped on up there. We're having a nice sunny day here. It's cold, but we don't have 40 inches of snow or whatever you guys got there.

Chris:

Well, it's a lot.

Bryan:

Obviously, the big news of the day is Silicon Valley Bank. That's kind of top of mind for everybody. You were on a call yesterday, so you have some insight. Let's go ahead and hear what you have to say about SVB.

Chris:

Yeah, I think so, yeah. I was actually on another quickly organized private investor call with Goldman Sachs yesterday about Silicon Valley Bank, SVB, and this is probably going to be a little bit of, you know, geeking out on financial data, but I think it's worth it. I'll try to keep the strokes broad.

Silicon Valley Bank was the investment bank for Silicon Valley. A lot of high tech and innovation. They also had a fairly significant portfolio in things like crypto and alternative currencies. And recently with interest rates going up, the stock market has actually declined about 20% with the cost of borrowing money going up.

This is about over the last year and that reduced the bank's liquidity, the banking system's liquidity. But in this case, SVB—it reduced their liquidity. And of course, crypto's had its own issues. And so the value of that part of their portfolio went down and then the overall stock value was going down.

And when we talk about the Federal Reserve raising interest rates, when they raise rates, what they're doing is, they're raising the cost that the banks pay to borrow money. They're not directly raising it on like your car loan or your house loan or your credit cards. They're basically raising it on the cost of borrowing the money.

And of course, then a lender does pass it off to the consumer. And in essence, what it's done is at some level, it will affect the profitability of the bank or banks. And so in this particular case, interest rates go up, stock market goes down, crypto has its own kind of decline in value, and the bank needed to raise about $12 billion and couldn't do it.

And then the FDIC stepped in and basically said, "We're going to take the bank over, we'll make all the deposits good," which they don't have to do. They only have to insure up to $250,000. But the Federal Reserve came in and the FDIC came in and said they would make good all depositors' funds, which was, I think, the right thing to do.

But also I think it's steady to calm the markets. You know, the stock market's gone down a little bit. But generally speaking, I think this was good and I don't think this broadcasts a broader banking crisis like what we saw in 2008. I think this one in particular has got the influences of cryptocurrency and things like that.

Bryan:

Absolutely. So kind of jumping off of that and boiling it down—what does that mean for people in real estate, in the industry? What can they expect moving forward, coming off of this?

Chris:

Well, first of all, I would say is that I have given you a very broad schematic of this. And if you're interested in it, I would really encourage people to go to Yahoo! Finance or any of those places and you can learn about it. It's worth following. I think the long and the short is that the Federal Reserve has been under a lot of scrutiny for their target inflation rate of 2%.

And when you take a look at like, inflation—it's roughly 6% or something like that right now, it peaked at like eight or nine. And so what I get out of this is that the reason why the Federal Reserve has been under so much scrutiny with this really low inflation target is because we just finished a pandemic.

There's a ground war in Europe and basically the entire globe is flush with cash, because of the stimulus packages that each country's federal, each country's Reserve Bank, central bank had designed for their particular country to help them get through the pandemic. And so you take those three factors and you're like, "Really?" 2% inflation, that doesn't make any sense.

You have supply chain disruption, you have energy disruption with what's going on in Europe, getting away from Russian energy supplies. And so and I think that skepticism about this 2% inflation target has really come home to roost. So what does this mean? You're going to see interest rates go down.

They're going to meet next week; you might get one more small rate increase or they might hold. But I think at the end of the day, they're going to have to reduce rates... the rate that they, the Federal Reserve, charge the banks. Which then gets passed on to the consumer. But they're going to have to reduce those rates to increase the liquidity in the banking system and increase in the profitability for the banks.

And I think that's what we're going to see.

Bryan:

Interesting. Very interesting. So your prognostication is interest rates taking a slight downturn here shortly, soon.

Chris:

They could be quite a bit. One of the forecasts I saw on my call yesterday was a full point, a hundred basis points. Wow. Yeah. When they say basis points—a basis point is equal to like 1% or one point. So you say 100 basis points, that's equal to one full percent.

Bryan:

Well, getting into our final topic, as always, what advice—general advice, life advice—do you have for people this week?

Chris:

Well, you never know when the next shoe is going to drop, but you're always guaranteed one's going to drop. You never know what the unexpected is, because it's unexpected. The one thing, though, that we can always be guaranteed—no matter how quiet it might seem, there's always something unexpected that's going to happen.

And although we might be a little surprised at what the event itself is, we should really never be surprised that there's some of that. And this kind of came out of nowhere—I think the silver lining in it is that, in this particular case, I think it highlighted a poor interest rate policy from the Federal Reserve, the depositors are going to be covered, it'll probably help lower interest rates.

So you never really know exactly what the unintended consequences are of these surprise events. But I think this one could turn out really, really well for everybody, with the lower cost of borrowing.

Bryan:

Interesting. So, yeah, expect the unexpected is always.... expect the unexpected... It's always good advice. I think it's a good way to go into the world. You'll never be surprised.

Chris:

Yeah, my phone was blowing up with all these alerts from Goldman Sachs, and I'm like, "What is this?" And I went on and was like, really? You know, Silicon Valley Bank?

Bryan:

Wow. Well, that's going to do it for this week's episode of Change and the Market. Fantastic advice, as always, from Chris. If you're enjoying our show, make sure you like subscribe or follow us on whatever platform you're watching or listening to us on, and join us back here next week for another brand-new episode of Change and the Market.

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