Real Investor Radio Podcast

Craig Fuhr (00:15.478)
Hey, it's Craig and Jack from Real Investor Radio. We're going to do a quick hit on yesterday's report, stunning report, Jack, that came out from the Bureau of Labor and Statistics. This is not not conjecture, Jack. This is actual facts that came out from our government where they released a significant revision to their job growth data over the past year. So the report revealed that the U .S. economy added 800 and I like how they say added

Craig Fuhr (00:44.982)
818 ,000 jobs fewer than what was reported initially between the months of March 23 to March 24. So that by the way, Jack was one of the largest decreases in the reported data. It was a miss by 30%. So they basically, it happens every month, right, Jack, they released the sort of the employment data, jobs reports, and normally those numbers get revised.

Craig Fuhr (01:14.326)
a month or two later and to know to you know to know news reports whatsoever right so that the the labor the bureau comes out with like yeah we added 140 000 jobs missed our mark by whatever and then we find out a few months later to know to no news that they missed it by maybe one percent whatever this was a misjack by 30 it was the largest miss year over year in the data

Jack BeVier (01:20.601)
Right, yeah.

Craig Fuhr (01:44.31)
since 2009 and it was significant. So.

Jack BeVier (01:47.472)
Well,

Jack BeVier (01:48.113)
did they give a reason for why the miss was so large? Because that's a shockingly large error,

Craig Fuhr (01:56.246)
It is a shockingly large error. I didn't unfortunately get into the entire, I don't have the entire story in front of me, but I think what it signals, Jack, and you know, we're just doing a little quick five minute hit here. I'd to get your take on it. You and I have talked about sort of, you know, Fed rate cuts. We were all exuberant at the beginning of the year when Powell said there will be three cuts this year, then came out and obviously said, well, you know, we've kind of got inflation under control and people are still working.

Craig Fuhr (02:25.078)
And so we're just going to kind of continue where we are with rates and in this higher rate environment. I think this signals, Jack, when the Fed meets on September the 19th, which is just a couple of weeks from now and three weeks from the election. I think it signals maybe a better than a 25 bips rate cut from the Fed. What do you think?

Jack BeVier (02:50.704)
Do think that inflation is under control?

Craig Fuhr (02:53.206)
No, no, I think I think when you know, when the when the when the when the government comes out and says we you know, we're at 3 % or whatever, I don't think the average American feels that I think they walk into the grocery store, and they see eggs up 50 % and bacon up 50%. And, you know, gas, gas is at $3.69 and energy is up, you know, to heat your homes or cool your homes is up 50 % car insurance is up 50%.

Craig Fuhr (03:20.15)
You know, all of those things, I think the average American still feels. And I don't know that three weeks before an election, when they reduce rates by maybe 50, 50 bips, we'll see. I don't know that that's going to be fast enough to sort of get, I think the news will be reporting all about that and, and, you know, create an exuberance in the market. But no, I don't think the average American feels a 3 % a year inflation rate right now. I think they feel something more significant.

Jack BeVier (03:47.546)
Yeah, me, me.

Jack BeVier (03:49.778)
Yeah, me, me neither. And that's that was my like, that's been my opinion of like, I was a I doubt we'll get a rate cut this year. I think we'll probably get one now, given what the jobs data has done. But I'm not convinced that inflation, I'm not so convinced that inflation is fully under control. And so I feel like that's like the counter, you know, the jobs data coming out, not not as strong.

Jack BeVier (04:16.336)
suggests rate cuts, but I don't know. I'm but I'm not convinced that the inflation is fully under control to allow them to do something like that. So. I mean, you know, we're all just crystal ball in here right now, but like I'm going to guess just a single 25 BIP drop and then and then we'll see. But those two things are like, right? We have like tenuous inflation and weak.

Craig Fuhr (04:29.898)
Yeah, because

Jack BeVier (04:45.516)
and weak jobs and election season. Like that's a, that's a tie. I would, would, I do not envy chairman Powell right now.

Craig Fuhr (04:53.942)
It's

Craig Fuhr (04:54.242)
a cauldron of crap that he has to navigate through to navigate the country to a soft landing that they're hoping for. So, yeah. Well, we'll keep an outlook on that. I think it's interesting. Obviously, Jack, we've seen a significant decrease in the five year, which has caused the DSCR loans that we do here at Dominion to be priced better. Look, we're quoting 70 % DSCR right now at six and a quarter.

Craig Fuhr (05:23.254)
and 75 in most cases at six and a half, six point, you know. And so we haven't seen those types of rates, which has created a real exuberance for guys looking to refi. I'm sorry, investors looking to refi. You know, the phones are ringing off the hook here at Dominion. I still like Jack, quick take, quick take, because we're hearing from a lot of investors now that guys who have onesie twosies and I, you know, we get calls every day from folks with portfolios that they want to refi and

Craig Fuhr (05:53.588)
You know, we're quoting rates, Jack, that we haven't seen in two years with six handles on them. Right. And there's a lot of guys are going like, yeah, you know, that's great. It's exciting. You know, I really feel it. But we think that the rates are going to continue to slide. We we really see the Fed coming out and doing something in September. And and, you know, I think our argument is, well, these are all priced off of the five year.

Craig Fuhr (06:20.436)
you know, index. And so what's your take on guys that are just like, yeah, I like that six handle feels really good. But we're gonna we're gonna sit on the sidelines and still wait to see you know, gamble play play gunslinger and see if they still continue to slide.

Jack BeVier (06:35.184)
I'm not, I'm looking forward to doing my next next refi for Dominion because I'm locking in the win at these rates like debt service coverage works again, like it's real when you get in the low sixes, low and mid sixes, at least for the properties that we're buying.

Craig Fuhr (06:48.235)
Yeah.

Jack BeVier (06:58.456)
I think that trying to time the market is a tough thing. Also, just given all the risk factors that are happening right now, the things that we just talked about, right? Like the combination of inflation being sticky and jobs being weak. feel like locking in some wins is kind of a good idea and going into an election season, locking in some wins is a prudent thing to do.

Jack BeVier (07:26.938)
I've also gotten some feedback from like New York folks basically who are saying that the as we get closer to the election, they think that Wall Street will start to price things wider like the credit spreads will actually widen out because you know, because people literally don't know what's going to happen at this point. Like it's a race right now. Right. And and depending on you know,

Jack BeVier (07:57.05)
who you are and what were you line up like there's going to be winners and losers in this election. And so people think that things are going to might get price that that risk might get actually priced into things as we get closer to the election. I think right now it's not really priced in or that pricing or those risks aren't in the pricing right now. So I think that's for me right now.

Jack BeVier (08:22.864)
I'm encouraged to act right now. I'm concerned that it came down too far. Like it came down really far, really fast. And I'm concerned, I'm worried about the bounce back.

Craig Fuhr (08:29.684)
and really fast.

Craig Fuhr (08:34.366)
What's your

Craig Fuhr (08:34.868)
take? So for, you know, setting the risk aspect aside for the folks who buy these notes, what's what, what do you think about the notion of, yeah, I mean, if the rates slide a little bit more, maybe there's a floor and we increase the index, to capture more revenue. I mean, it's not necessarily just a risk thing. It's like, Hey, this is real opportunity for us to make more, more bips on these notes that we're buying, right?

Jack BeVier (08:54.372)
Yeah, they could.

Jack BeVier (09:01.712)
Yeah, they could. And only the competition amongst the insurance companies versus the securitization shops is keeping that in check. Right now the insurance companies are basically like, you know, gotten their elbows out and said, hey, no, we're going to go do 5 billion this year of DSCR. And so they've kind of bought the market from a rate point of view.

Craig Fuhr (09:14.665)
I see.

Jack BeVier (09:30.466)
If they change their mind, you know, but that's the you know, if they change their mind, well, you know, they can, you know, they can. So it's it's also not like, like, yeah, the DCR rates right now. That's that's a that's something worth mentioning. The DCR rates right now are a function of the insurance companies wanting DSCR loans. And they made allocations for twenty twenty four.

Jack BeVier (09:53.777)
that they make annual allocations, right? Like that's how insurance companies work. We're going to go put $3 billion into this product at this return profile. And so January 1, 2025, new ballgame, right? And that'll be post -election too, right? And they can make a completely different asset allocation decision for 2025 and be like, no, we're good. Like we've got, you know, we've had, we had the best of it.

Craig Fuhr (10:01.526)
Hmm?

Jack BeVier (10:23.344)
Like, you know, we think we did the best of it. Like we'll let we'll let Wall Street start to buy that stuff. You know what? We're to go start buying corporate corporate or corporate debt. Right. Because we think the returns over there are better. And all of a sudden, this insurance bid disappears or gets much thinner. Well, rates go up 50 basis points in the SCR immediately. So it's not a liquid. It's it's it's liquid, but it's not as liquid as like as your 30 year residential consumer mortgage. Right. It's

Jack BeVier (10:52.974)
It's a unique product. so that the insurance companies are so aggressive about this product right now, that's the reason for rates being where they are right now. It moves with the five year, but they're artificially low right now. The insurance companies are under bidding the Wall Street bid. And that's unique. That doesn't happen. That's not normal. That's an aberration.

Jack BeVier (11:20.74)
like and they know it they know that they are under bidding the market. So I'm not taking that for granted is my point like while that's happening like while somebody has said, hey, I'm going to overpay for that right for overpay for that paper by by by offering a lower rate than I should. I'm a seller when somebody is an aggressive buyer like that.

Craig Fuhr (11:43.254)
So I'm going to nail you down for prediction. You just mentioned, you know, they allocate this bucket of capital on say, Jan one of 2024. We're going to buy 3 billion of DSCR notes. What's your prediction, Jack, for the allocation that an insurance companies make for that market in 2025, January 2025? Is it going to be? I'll give you an easy one first. Will it be?

Jack BeVier (12:07.204)
will soon

Craig Fuhr (12:11.35)
Will that allocation increase over 2024 or will it be smaller than 2024?

Jack BeVier (12:21.616)
That's a hard one. The answer is I don't know. on the good side of things, default rates have stayed low, parentheses, so far. A recession and lower rates. So if we have a recession and lower rates, then it could go down because the insurance companies won't be as excited about

Craig Fuhr (12:23.042)
I love these.

Craig Fuhr (12:27.646)
Of it's a prediction.

Jack BeVier (12:51.31)
the rate that they're getting the interest rate that they're getting and they'll be like, you know, I'm getting low sixes. I can get low sixes lots of places. yeah. And if the, and if a recession causes default rates to increase, now I'm getting a lower rate and you know, I'm getting a lower rate because the five years lower and I've actually got default risk now. you know, I'm actually having some defaults. So

Craig Fuhr (12:59.05)
that are maybe more stable.

Jack BeVier (13:16.258)
In a downside economy scenario, I think there's a real risk that it goes down. And then as a result, DSCR rate, like the insurance bid is a thinner bid. And then the Martin as a result, rates to borrowers go up because there's less insurance money chasing that paper. If the if the economy continues to hum along and the five year just stabilizes here or goes back up a little bit, then I could see it.

Jack BeVier (13:44.893)
staying the same or maybe even increasing because they're like, Hey, now this is just great paper. But I feel like the former is a real risk.

Craig Fuhr (13:54.198)
So for those of you listening, that was Jack hedging his bets and not really making the exact prediction based on his market knowledge. So what is the prediction Jack? Up or down? January 1st, 2025. Does the bucket increase or does the bucket decrease?

Jack BeVier (14:07.183)
Yeah

Jack BeVier (14:09.966)
Yeah, well, I don't really wanna -

Jack BeVier (14:14.736)
I didn't want to say you made me think about that downside scenario, which I'm worried about. I think that's a real risk. So.

Jack BeVier (14:30.02)
I don't like to, I don't like that thought, you know, like I don't like to, I don't like to think about that. People don't, people don't like to think about, you know, downside things, right? They, they, as a result, they underestimate them. So, so yeah, you know, then I'm going to say based off of that, yeah, DSCR rates, I'm going to say DSCR rates may have bottomed, like the, that, that this is peak, that this is the best it gets for borrowers from a credit spread point of view.

Craig Fuhr (14:33.78)
Nah, it's not a good thought.

Craig Fuhr (14:56.086)
that is an interesting prediction. And frankly, I had I there are many reasons for me to feel the same. You know, without getting into market volatility, where we are in the world, crazy election season, you know, wars breaking out everywhere. I think I think time will tell over the next three to four months where we end up in 2025. So that was an interesting discussion.

Craig Fuhr (15:24.32)
Quickie for you guys. Hope you enjoyed it. Jack, thank you for the time. This is Real Investor Radio. We'll see you on the next one.