As James Whelan rightly points out in today’s entirely free edition of Free Whelan: a few weeks ago by no fault of our own, we all had to suddenly become bloody experts on US banking, their messed up regulatory systems post-GFC, as well as the  solvency and collateral issues, post-COVID.

Then last week we had to text book up to become experts on Swiss investment banks and their Additional Tier Bonds.

This week, Whelan is adding his voice to a small but growing chorus saying it’s time to do some fast-track work on the potentially iffy state of US commercial real estate and (sigh) their mortgage-backed securities.

VENKMAN: “You’re not going to lose the house. Everybody has three mortgages these days.”

STANTZ: But at nineteen percent–you didn’t even bargain with the guy…

As far as US banks go, James is ringing the alarm bells even as they appear to pick themselves off the mat.

When an industry worth some US$20 trillion isn’t 100% terrific  – as the US commercial real estate (CRE) industry apparently isn’t, it’s probably worth some time to check its pulse.

After literally decades of booming CBDs and growing office blocks, fattened on super low interest rates and easy credit, commercial real estate could pose a bit of a problem.

Around the world, office and retail property valuations have been falling.

it’s not hard to see why.

The COVID-pandemic changed everything  about the way we work.

Occupancy rates must be awful. Then there’s the changes about where people work, where they eat and play and OFC, how they shop.

Then there’s the US Fed’s efforts to kill inflation dead by pumping interest rates to the moon. For a credit-dependent industry, one could imagine how a run on banks might complicate matters.

Yet, at the time of writing The Dow Jones Industrial Average was gaining and looking good on Monday.

Talking to CNBC (which I may’ve had on in the background inside the frozen man-cave that is my office here in Annecy, France), I couldn’t help but note the satisfaction of  a global market strategist at Invesco I think it was Brian Levit)… who said:

“Market sentiment is improving as policymakers take steps to alleviate the recent challenges, … yada yada … so an extension of the liquidity facility set up by the Federal Reserve meaningfully eases prior concerns that a series of bank runs could be in the offing.”

“We came, we saw, we kicked its ass…”

Really fantastic news – and I think the other punters were also listening because Wall Street is rising happily and the banks are right in there.

As I look at the screens, I think to myself how these 0.75% gains for the Dow really look handsome on top of last week’s contrary-to-everything-that’s-been-happening gains.

One could be given to thinking US traders just want to move on from the latest crisis which started like some kind of unforseen economic crisis across US regional banks with the collapse of Silicon Valley Bank.

But the animal spirits are upbeat and, well, it’s working.

Regional banks are rising in Wall Street across the board.

The S&P Regional Banking ETF (KRE) was killing it Monday morning – up over 1.4%, around lunchtime in New York after jumping well over 3% in the most perplexing morning business.

Crappest regional bank on the US bourse, First Republic was up by 11%.

“Ray… this is bad…”

James is not comfortable with this kind of unnatural behaviour.

And neither is the Bank of America (BofA). I also think JP Morgan is very unhappy.

The BofA has connected exactly the same dots as Whelan, fearing the next domino to fall will come from the unexplored connections between vulnerable little regional US banks and – of course – real estate, but in this case it’s commercial.

“Don’t touch it.” James says.

“Simply put, US regional banks are suffering huge outflows of deposits, therefore leaving less to lever up and invest, regulations are getting tighter (obviously) and risk tolerance much lower (again, obviously) on investments.”

And now for the worst 3 words in recent US banking history…

Apparently some $4 and out every $5 dollars in US commercial real estate has been doled out by eager lending regional banks.

On top of that there’s reportedly some US$275 billion worth of commercial mortgages just ticking time-bomb-like and all set to expire this year.

The BofA’s Michael Hartnett publisher of the popular Flow Show report, has told clients that the spreads for (commercial) mortgage-backed securities (I didn’t think I’d have to be writing those 3 words together again for a while) are widening with Treasurys – in fact they’re getting canyon-esque by the sounds.

In his weekly missive Hartnett says he had to track on back as far as May 2020 to find when American (commercial) mortgage-backed securities were spread as wide as they are now.

“Commercial Real Estate (is) widely seen as next shoe to drop as lending standards for CRE loans to tighten further,” Hartnett added.

In today’s uncomfortably calm rant, James Whelan says it’s depressingly scary.

“Rising outflows, declining share prices, more leverage to a depreciating asset, and the work from home life here to stay…”

Recipe. For Disaster.