Credit default swaps are rising and one economic sector in particular will feel the pinch from the lack of trust in the banking system.
The current economic environment is putting a ton of pressure on the banking sector, and Ark Invest head honcho Cathie Wood says this could lead to a hard landing for a very important sector of the American economy.
Surely there have to be some economic ramifications for the current economic environment, and Cathie Wood sees the commercial real estate market as being the bellwether for these ramifications.
“The commercial real estate market… is basically frozen. We are beginning to see more defaults and fire-sale prices,” Wood said in an Ark Invest podcast posted recently.
“If you look at the loans to the real estate market, somewhere between 65% and 75% of them came from the regional banking system. So that’s a problem because deposits are still in outflow mode,” Wood said. “It’s not a good situation for commercial real estate.”
As deposit outflows from the banking system (private) into money market funds and treasury securities, it provides “a little bit of a flight to safety,” according to Wood. This action is accommodating government spending, which means its crowding out something and that something is commercial real estate.
“In banking we are witnessing the public sector crowd out the private sector.”
Credit default swaps (bets on bankruptcy insurance policies) started moving up last spring as the Federal Reserve started to raise interest rates. CD swaps started moving up on all banks, even money-center banks, Wood said. And this set of alarm bells for the seasoned investor.
“Last October I said what’s going on, JPMorgan’s CD swaps are getting close to where they were during the height of the covid pandemic.”